英賽德 (INCY) 2002 Q3 法說會逐字稿

Good evening and welcome to the Incyte third quarter earnings conference call. At this time all participants have been placed on a listen-only mode followed by a question-and-answer session. At this time, I would like to turn the floor over to your host, Mr. Paul Chirico. Sir, you may begin.

Thank you. Welcome though third quarter fiscal year 2002 earnings conference call for Incyte Genomics. I am joined by Paul Friedman, Incyte's Chief Executive Officer; Robert Stein, Incyte's President and Chief Scientific Officer; John Vuko, Incyte's Chief Financial Officer; and Jason Rueben, Incyte's Executive Vice President of Corporate Affairs.

Let me first remind everyone the statements of management that will be made during this conference call and in response to investor questions will contain predictions, estimates and other forward-looking statements, including without limitation, statements regarding Incyte's proposed acquisition of Maxia Pharmaceuticals, the announcement of Incyte's expense reduction program for 2003, and the implementation of and expected financial and other impacts of such programs, the progress of and anticipated growth of our therapeutic discovery and development of efforts, and guidance for the fourth quarter of 2002 and for the year ended December 1, 2002. These forward-looking statements and all other statements that being made on this call and do not state historical facts are subject to a number of risks and uncertainties that may cause actual results to differ materially. Please see Incyte's 10-Q for the quarter ended June 30, 2002, the press release issued by Incyte earlier today, and Incyte's other filings with the Securities and Exchange Commission for details on these risks and these risks other risks detailed from time to time therein.

A replay of this conference call in its entirety will be available from 12 midnight Pacific Time, November 19, 2002. The replay dial-in number for both U.S. and international callers will be 973-341-3080, and the pin number access code will be 3568672. An opportunity for questions will immediately follow our presentation, and the operator will repeat the instructions for asking questions. I will now turn the call over to Paul Friedman, who will comment on today's strategic announcements and discuss Incyte's associated business strategies. Paul will then turn the call over to John Vuko, who will present Incyte's third quarter fiscal year 2002 financial performance. With that, I'd like to turn the call over to Paul Friedman.

Good afternoon. Today we reported several important strategic developments which we firmly believe will have a significant positive impact on our company. First, we announced our agreement to acquire Maxia Pharmaceuticals, a privately held small molecule drug development company, for up to $28 million in cash and stock and up to $14 million in future clinical milestone performance payments.

Maxia has an impressive set of small molecule drug discovery programs which complement our interest in treating cancer, inflammation and metabolic disorders. By acquiring Maxia's growing pipeline of drug candidates, we will also accelerate our move into clinical development. Maxia has a number of anti-cancer compounds being optimized, as well as several interesting compounds for diabetes being advanced toward clinical development by Johnson&Johnson. Together we will have a much broader pipeline with greater opportunities for scientific, clinical and commercial success. We are excited about having Maxia join forces with us, and we look forward to closing that merger after we receive clearance from the California Department of Corporations and the approval of Maxia's shareholders.

Today we also announced plans to reduce expenses by almost $90 million annually beginning next year through a combination of budget cuts, staff reductions and office consolidations. This decision was driven by changes in the Genomics marketplace, by our belief that streamlining the information business will make it more responsive to our customers' needs and by our commitment, which we have been steady about to operate the information business on a positive cash flow basis.

When Bob Stein and I came to Incyte a year ago, we were determined to take the necessary time to fully understand the information business, to assess Incyte's capacity to develop and market new products, and to examine our operating costs. After completing a comprehensive review of Incyte's business operations and creating a three-year plan for the information business, a plan which I discussed previously, we concluded that we could operate effectively with fewer people and still provide the high quality genomic and [proteomic] information products and services our pharmaceutical and biotechnology customers require. Therefore we made the difficult decision to eliminate 258 jobs, more than a third of our workforce from our offices in Palo Alto, California; Beverly, Massachusetts; and Cambridge, England. Most of these reductions are taking place here in Palo Alto and will result in the consolidation of four office locations here into two.

I fully appreciate the gravity of this decision, and I recognize that these are painful reductions; but the changes taking place in our industry, especially consolidation among pharmaceutical companies and some significant shift to later stage R&D spending by pharmaceutical and biotech companies, required that we adapt as well. We remain committed to offering our customers the best products and services possible just as we are committed to creating value for our shareholders by managing our business efficiently. The actions we're taking today will allow us to do both by focusing our resources on database products, an area of traditional strength for Incyte, as well as ne licensing opportunities from our very large patent state and on drug discovery.

None of these reductions affects our drug discovery activities in Delaware, which have flourished under Bob Stein's and Brian Metcalf's leadership. In fact, today's actions will help preserve our cash so our drug discovery group can continue its rapid progress for identifying drug candidates for clinical development.

As I have said before, we are fortunate to have recruited some of the industry's best and brightest chemists and biologists to Incyte. We today employ nearly 80 research scientists in Delaware to which we're going to add another 80 to 100 over the next year. In the six months since we began research activities at our Delaware lab, the team has moved quickly to get up and running. As a result of their efforts, I am pleased to be able to announce that we have launched our first fully staffed drug discovery program. This program is seeking small molecules that block the actions of a specific [chemokine] involved in chronic inflammation. Antagonists of this [chemokine] could be useful in treating rheumatoid arthritis and other disease in which chronic inflammation plays a role.

We have over 20 of our scientists working on this program, and based on their rapid progress so far, believe we will have optimized and selected a clinical candidate for development in 2003. In the meantime, we expect to launch a second and fully staffed discovery program by the end of this year. That concludes my introductory remarks, and I'll now turn the call over to John Vuko to review our financial results and fourth quarter forecast. John?

Thank you, Paul. Our revenue for the third quarter was &22.4 million, compared to &57.3 million for the third quarter of last year. Exiting the custom genomics product line accounts for approximately $12 million of the decrease, while lower information line product line revenue represents the remainder. The reduced information product line revenue resulted from a combination of lower licensing activity and database revenues reflecting the slowdown in spending by pharmaceutical and biotechnology companies that we have commented on in the past. The net loss for the third quarter, before approximately $8 million of asset writeoffs, was $30.4 million or 45 cents per share. The $8 million of write-offs relate to prepaid licenses and software that are now limited value to Incyte. Including the $8 million, the net loss was $38.4 million or 57 cents per share.

Research and Development expenses of $47.3 million include the $8 million of prepaid license and software write-offs and $3 million of accelerated collaboration expenses, reflecting the progress that has been made with one of our discovery and development collaborators. The $47.3 million reflects the reduced spending from our having exited the custom genomics product line and reduced software development costs, as well as increase in expenses from our small molecule efforts on the East Coast. Selling, General, and Administrative expenses were $12.1 million or 32% below the third quarter of last year. This reduction also reflects our having exited the custom genomic product line and lower litigation and infrastructure expenses.

We have adopted FASB No. 144, which related to accounting for the impairment of long-lived assets. Accordingly, we have reclassified the $5.8 million loss we recorded last year related to the divestiture of the Company's transgenic product line from "interest and other income expense" to "operating expenses". Our cash and marketable securities position remains very healthy at $452.8 million.

As Paul mentioned, we announced an expense reduction program that will eliminate $88 million of annual expenses beginning next year. The reductions will be predominantly in salary related and facility expenses. As a result of this program, we will take a one-time charge of up to $40 million. We are now forecasting fourth quarter revenues in the 20 to $25 million range and a net loss of 63 to $68 million which includes the one-time charge related to the expense-reduction program, but does not any expense reduction related to the acquisition of Maxia Pharmaceuticals. We are also forecasting our cash and marketable securities to be in the 410 to $420 million range at year-end. We will provide guidance for 2003 during the 2002 fourth quarter earnings release call which will take place early next year. With that, I'll turn it back to Paul.

As you can see, we have embarked on an aggressive cost-cutting program to control expenses, to operate more efficiently and to preserve our cash. We are rescaling our information business to keep it cash flow positive and focusing resources on those activities that provide the most value for our customers. These measures also make it possible for us to invest prudently and aggressively in our drug discovery activities, as demonstrated by our announcement today about the pending acquisition of Maxia Pharmaceuticals and the staffing of our first discovery program.

In closing, this has been a very challenging but also a very productive year for Incyte. I believe we are on the right path and that we will succeed in creating superior products for our customers, effective new medicines for patients, and significant and lasting value for shareholders in the years ahead. That concludes our formal remarks. Now I'd like the operator to open the call to your questions.

Thank you. The floor is now open for questions. If you do have a question or a comment, you may press the numbers one followed by 4 an your touchtone telephone at this time. If at any point your question has been answered, you may remove yourself from the queue by pressing the pound key. Questions will be taken in the order they are received. Please hold while we poll for questions. Thank you. Our first question coming from Dennis Harp with Deutsch Banc.

Thanks for taking my question. First of all, John, could you run us through the Maxia acquisition and what of the $28.3 million will be cash and what will be shares, and how will the share price be determined?

Dennis, we haven't announced the exact split on how much will be cash and how much will be stock. It will be more stock than cash, and the price of the stock will be determined as we get to closure.

Will any of the 14 million in milestones be stock?

Yes, a portion of that will be. It will be priced at the time of those particular payments.

Great. On the R&D expense, the $88 million annually, you mentioned that it's mostly salary and facilities; but what portion of the &88 million is R&D versus G&A?

You meant the $88 million of the expense reductions?

Yes.

In an exact split, I will tell you the vast majority of that will result in R&D expense reduction. An exact split, we are not quite prepared to present, as we'll finalize exactly how that falls out within our 2003 guidance, but the vast majority of it will in fact be R&D.

And then just one final question for Paul or for Bob: The chemodind receptor antagonist, is this chemokine a novel chemokine, and is its receptor novel, or are there drugs out there today which antagonize this chemokine?

I'll let Bob handle most of that question, Dennis, but there are no current drugs out there that impact this particular target. Bob, you want to comment on the novelty aspects?

Dennis, we don't actually want to say exactly which chemokine and which receptor it is. As Paul said, there is no developed drug that does act on this particular target, but there's a very strong and compelling biological rationale for believing it's a good target to intervene.

Great, thank you.

Thank you.

Thank you. Your next question is coming from Alan Auerbach with Wells Fargo Securities.

Good afternoon, thank you for taking my questions. First of all, regarding the P&L, you had stated there was an $8 million in prepaid license and software write-off; does that show up anywhere on the P&L?

Alan, this is John, that's included within the R&D spending.

Okay, and with regard to the guidance you gave for Q4, you stated 20 to $25 million in revenue, and we would see a one-time charge of up to $40 million dealing with this restructuring. Looking at your net loss guidance, that pretty much puts your operating expenses in the range of about 23 to $28 million; am I correct?

It would be the expenses before the charge. There are some interest and other income items. I think what you've done is backed out the $40 million from what we call the "net loss".

Right. Okay. Is that type -- that's a good narrowing of your loss -- is that a trend we can see going forward into '03?

I would say that it's much more indicative of what our run rate would be, but also understand that going into '03, we'll enjoy some more of the expense reductions that we have announced; some of those will not be reflected in the Q4 results. Was that clear?

Yeah. With regard to Maxia, when is the acquisition expected to close?

We are hoping that ir should close before the end of the year, but it may well go into January before we can close, because we have to get the opinion back from the California Department of Corporations, and that can take between 30 and 60 days, is my understanding.

At this time, can you give us specific details about Maxia and things like details of the collaboration they have with Johnson &Johnson on the diabetes compound?

I think we can give you some information, and Bob, you want to take a crack at that?

Some of it isn't publicly disclosed at this point, Alan, but they have a very good collaboration they have had in place with Johnson & Johnson looking for compounds which would be useful for the treatment of non-insulin dependent diabetes. And there are some compounds tha have resulted from that that are advancing toward clinical development. It's an interesting mechanism not currently exemplified by developed drug either, so we think that's quite good. They have a number of programs which they hadn't previously partnered, which they have made -- progressed quite well on their own; one of the more advanced of which involves making inhibitors for specific [INAUDIBLE] that have attractive biological and chemical properties.

With regard to the diabetes compound, can you state what the details are of their collaboration in terms of the financial commitments?

I don't think we should do that at this point.

And with regard to the pipeline that Maxia has, can you give us any expectations; how many of these drugs can we expect to see in the clinic over the next 12 months?

In the acquisition of Maxia, we did not buy their most advanced compound, which was called MX 6 which was in phase II for cervical displacia. The J&J compounds are advancing towards the clinic, but until there are more specific details released by J&J, we we're not going to discuss that. And then we also have a belief they have some phosphatase inhibitors that are close to being optimized and we hope to have something which might be identified for development from those programs in the next year.

Okay. Okay, thank you.

Sure, thanks.

Thank you. The floor is still open for questions. If you do have a question or comment, you may press the numbers 1 followed by 4 on your touch tone telephone at this time. Thank you. Our next question is coming from [Mirav Shobav] with UBS.

Hi, this is actually AnnaBelle [Senimi]. Couple questions: Can you gives an idea of what the run rate for Maxia's -- the burn rate for Maxia's burn is? And also, do you have any partnering strategy for the compounds you that you either have in proprietary development or that's coming from Maxia?

The burn rate at Maxia is low, and a significant amount of it is taken care of by the J&J collaboration. Maxia's burn rate will not significantly affect our overall R&D burn rate. In fact, it will be incorporated in our guidance which we're going to give you in the first quarter of next year. But the plan here is to decrease the amount of recruiting, and therefore the burn rate that we have on the East Coast in view of this acquisition. We have a three-year growth plan for our East Coast R&D, and this -- these 28 individuals that belong to Maxia will offset the headcount that we would otherwise have brought to the East Coast. So that's I think as much as I can say about that.

With respect to a plan for a partnering or what to do with our own compounds or with the Maxia [phosphatase] inhibitors, we are evaluating those options, but we have not finalized the direction we want to go either with the internal compound at the time we take it into development or with the [phosphatase] inhibitor.

Great, thank you.

You're welcome.

Thank you. Your next question is coming from David [Witsky] with Morgan Stanley.

Thank you for taking my question. I guess first on Maxia, what preclinical capabilities do you get in this acquisition as far as do you still need to bring in IND enabling capabilities or is that in place at Maxia?

The folks at Maxia are predominantly -- they have about seven good chemists. They have molecular and cell biologists and whole animal biologists, but they don't have a lot of standing preclinical development capabilities. We also don't plan to build much of that immediately. We think we can handle that quite well with our existing internal expertise and the availability of appropriate CROs..

Okay. On the discovery side, can you talk about the library size, and does that satisfy as far as what you need to do as far as build out in Delaware?

They actually have a relatively small library of compounds that's been productive for them. We have been able to quite adequately generate a library of several hundred thousand very diverse drug-like compounds for an affordable price the Delaware screening operations. That's much less of a hurdle to entry in the small molecule drug discovery than it used to be, because it changed over the last several years.

When do you expect to have your discovery capabilities in Delaware kind of built out on the library side?

We're already in good shape on the library and the ability to do good high through-put screening. We have identified the leads for interesting preliminary targets. So that has come on board quite smoothly and quickly. It's one of the advantages have having put together a team of people who have been engaged in these activities before.

And then I guess a final question if we can get an update on your efforts to either form a major therapeutic collaboration or to kind of jump-start the clinical pipeline by in-licensing a phase I or II molecule?

So we still are having discussions with several companies on large companies on collaborations. With respect to in-licensing compounds, we continue to look for promising compounds to acquire, and we are interested in those that are either near optimal for nomination for entering development , or those, as you said, are in phase I or II. As you well know, the farther along one goes in that spectrum, the more expensive the acquisition becomes, and people who have good things in phase II are not so willing to easily give them up unless large payment is made. So we are open to finding such compound pounds; we hope we can. And we are in active discussions with a number of companies who have compounds we are potentially interested in. Bob, you want to say something?

I just wanted to say that one of the aspect of us the Maxia acquisition is they do have some very good-looking compounds which are advancing towards clinical development with a [predope] partner with attractive commercial terms. So that is part of our execution on the strategy that Paul was describing.

Thank you.

Your next question is coming from Alex Hittle with AG Edwards.

Thank you. I was wondering if you could give us a few more details on the software write-off that you're taking in the quarter. What software was it, why has it been written off, et cetera? And then the second question I have is, is the information business currently cash flow positive or not at the moment, and will it become so with this restructuring program? Thanks.

This is John, I'll take the last question first. Information product line was cash positive again in the third quarter. As to the software, it's software that we were looking at using with our database offering, and we ended up making the determination that the portion that we wrote off was not really optimal for what we were going to do going forward, and took the decision to write it off at this point in time rather than to carry an asset that would be of marginal value going forward.

That was for some interactions with an outside software developer and vender who was creating a tool for looking at Genomics information. Turned out the tool was probably a good overall tool for people, but too complicated for our needs and we wrote off some prepaid licenses that we had taken for that tool that had been successfully developed.

Okay. And then just to circle one more time around on Maxia, I'm curious if you really see this as buying a pipeline or buying a skill set.

I think it's a combination of each in that they do have some very good compounds both moving into human clinical trials and also at stages where we think they're close to having in other programs compounds suitable for development. And there's also a group of 28 people who are very involved in creating those, and we think we're getting both in the acquisition. And also to spawn programs which can also fuel our additional East Coast drug discovery efforts.

And did your database actually figure into your decision to buy the company?

Well, there's one very interesting aspect of that. We have a very strong patent position in the phosphatase arena. What the company has done is they have made a very significant breakthrough with respect to chemical scaffolds that have been allowed for a significant amount of worldwide availability with these -- with molecules that are directed against the class of enzymes where many people have run up against the inability to find compounds that have oral viability. So they have very interesting scafolds to a group of enzymes that are of extreme therapeutic interest but have been hard to get at. Because the kinds of things that are going to be treated by many of the phophatase inhibitors are in areas where you would definitely want oral viability; not all, because sometimes with cancer therapies you can give things [perennially], but there are a lot of opportunities to expand beyond a few cancer indications for a whole class of phosphatases. And it turns out that we have pretty strong patent position at Incyte on phosphatases.

Thank you.

Actually, it's Craig and I just had one follow-up question. I'm just curious about your last bullet point here, that you're proceeding with your stock repurchase program. I just wondered with -- why you're using cash to do that? Is the price of your shares so compelling down here you can't resist buying them either?

Well, I think -- this is John Vuko -- wen we made the announcement the board of directors just found that our stock price was at a price where it was just too attractive not to make this movement, so we think the valuation of the stock was compelling for us to do this.

Okay. Thanks.

Thank you. Our next question is coming from Sharon Seiler with [Thunk], Ziebel and Co.

Hi. Thanks for taking my call. I wanted to follow up on Dennis's earlier question with regard to the [cytocon] receptor antagonist. Again I'm curious, is the receptor and [ritocytakine] something that's unique to Incyte in terms of its discovery or something that is known by others as well?

As I said, Sharon, we aren't really going to state what that target is at this point. We do have a family of chemokine receptors of interest to us, some of which are novel and some of which are not novel but are something where we have room to operate and have very strong biological rationals. So there's an advantage of working on several in a group because you can get more leverage out of your chemicals that you make and the assays tend to serve as cross specificity controls that can be developed much more efficiently.

Okay, then I guess a follow-up question is when do you think they might have disclosure of some more information on this program -- on the specifics?

I would think -- excuse me -- the time that we are likely to be more forthcoming about the target would be when we would select a compound to put into preclinical development. At the pace that we are going, I would like to be able to say that we would have a compound to nominate in the first half of next year for clinical development. But with the vague areas of drug discovery, I don't want to be pinned down to that, but we have made extremely rapid progress and created a number of series of proprietary leads for this target.

Thank you.

You're welcome.

Your next question is coming from Dennis Harp with Deutsch Banc.

Thanks for taking my follow-up. For either Paul or John, the press release earnings references the "Life Seek Foundation database 3-Year Content Plan". Can you tell us a little bit more about that three-year plan and how it works and what percent of subscribers are on a three-year plan versus a "less than three-year" plan?

Dennis, the three-year plan is the plan for what we are going to give to our customers in the roll-out over three years, including new content and other improvements in the plan that we presented that at Deutsch conference in May, I believe. Bob, do you want to give a brief recapitulation of that?

That does not indicate to tie to length of subscriptions, but the idea is that we have a very good set of information about the set of genes which are actively transcribed in humans. We plan to provide to people a map of that against the human genomics backbone and relate that to our set of transcripts from animals which we have been selling separately at [INAUDIBLE]. So we're going to integrate those two products. We're also going to develop a gene expression body map in normal tissues from humans and from relevant animal species for both preclinical pharmacology and toxicity testing and to integrate into that, as well, the effort of our people who follow our literature and make useful abstractions from that and connect that to individual gene product that's been sold as the bio-knowledge library. So it's a plan to, in an orderly fashion, create a suite of genomics tools which will be useful to pharmaceutical partners.

Thank you for clarifying that.

Sure.

Thank you. At this time, we only have time for one further question. Our final question is coming from Patrick [Snigelsberg] with Metha Partners.

Thank you for taking the question. Could you just quickly reiterate your sort of research plans for Delaware and also Maxia. I seem to have missed that. I guess with respect to the programs, how many -- you currently have one at Delaware, how many people are there, how are you trying to expand that and how many people from Maxia are coming in?

I'll start and Bob can embellish on my answer. We currently have 80 scientists on the ground in Delaware doing R&D. It's a mix of chemists and medicinal chemists and biologists of various sorts. We have -- the way we do research is we have small projects where we do not commit a full set of scientists to work on that project until we have a high degree of confidence that we have both a validated target and an appropriate lead molecule. So we take a variety of targets and we can screen against them in high through-put mode and then we have to prioritize which programs we would put full efforts into.

The chemokine program that we have been talking about a little bit today and we described in the press release is the first program that we have felt strongly enough to put a full staffing effort on, and we have over 20 scientists now working on that program to optimize some very interestingly lead compounds that we have. Before the end of the year, we will select a second such program from a number of promising possibilities that the remainder of the staff are currently working on. By the end of 2004, we plan to grow to an R&D -- the drug discovery size of about 220 individuals. Of those 220, we have 28 now who are based in the San Diego area as part of Maxia Pharmaceuticals. Bob, do you have anything to add to that?

Just so that at the stage of 2004 we will probably have about 110 chemists, 110 biologists which ought to let us run 5 to 6 full programs and some exploratory programs behind those to move into place as we successfully conclude or decide to stop some of the full programs.

Brilliant. Thank you very much. One more quick question on your database business: I guess the amount -- is there any impact you foresee specifically on your relationship at [Lyon]?

We have a good relationship with Lyon. They've become our preferred software partner on the outside for presenting our data within many of our pharmaceutical partners shops; although, some of the pharmaceutical partners either make their own software or use both the Lyons software and other solutions as well. So we anticipate we will continue to have a healthy and productive international client.

Thank you.

Thank you. Gentlemen, do you have any closing comments?

Yes. This is Paul Friedman. I just want to thank all who dialed in to listen to our presentation today for doing so. We look forward to speaking with you going forward. Thank you and good afternoon.

Thank you for your participation. This does conclude this evening's teleconference. Disconnect your lines at this time.