英賽德 (INCY) 2002 Q4 法說會逐字稿

Thank you for your patience. The Incyte again number mix conference call will begin momentarily. If you should experience audio difficulties, you may press star zero and an operator will assist you. Thank you for your patience. Please remain on the line 7th. The Incyte Genomics conference call will begin momentarily. Thank you. Genomics

Good evening, ladies and gentlemen and welcome to the Incyte genomics conference call. At this time all participants have been placed on listen only mode. And the floor wil be open for questions and comments following the presentation. It is my pleasure to turn the flow to your host, Pam Murphy, vice president of Investor Relations and corporate communications. Ma'am, the floor is yours.

Thank you, and welcome to Incyte's fourth quarter and full year 2002 earnings call. With me are Paul Friedman, Incyte's Chief Executive Officer, Robert Stein President and Chief Scientific Officer, John Vuko Chief Financial Officer, and Lee Bendekgey General Counsel and Executive Vice President, and Jason Rubin Executive Vice President, of Corporate Affairs and before we begin, I would like to remind you_[inaudible, audio skips]. Now I'd like to turn the call over to Paul Friedman.

Good afternoon, in the next few minutes, I'm going to review our achievements for 2002 emphasizing our progress in drug discovery. I'll discuss our acquisition of

Maxia (ph)pharmaceuticals and our plans for this year. I'll then review our [inaudible audio skips] for the fourth quarter. And then I'm pleased to report that Incyte continues to move ahead rapidly -- in a very short time, we've assembled an experienced. [inaudible] We’ve launched already three full scale small [inaudible audio]. One in inflammation and three in cancer. The most advanced of these programs is focused on. [inaudible audio]. Antagonist of this receptor have the potential to prevent tissue damage caused by microphages (ph) and as such may have utility in treating inflammatory conditions such as rheumatoid arthritis, asthma, multiple sclerosis and even [inaudible] sclerosis. We’ ve discovered very potent selective and orally active chemo[inaudible] receptors antagonist and we’ve already reached proof of concept in animal studies with one of our lead compounds by demonstrating when administered orally the compound effectively block inflammation in mice.

Patent applications have been filed on several compounds and our goal is to move elite compound into pre-clinical testing this year. Our cancer research programs are focused on developing inhibitors to run a specific protease(ph) and the second program to several protein phosphate cases that appear to contribute to the abnormal proliferation of cells in a variety of cancers, including breast, lung and colon. Our res earch scientists have made important progress in determining how these enzymes influence the activities of other key proteins that drive cell proliferation. Lead compounds have been identified for each of these enzymes and we're in the process of optimizing these leads. The lead compounds in the protein phosphates programs come from Maxia pharmaceuticals and we're pleased to announce today the completion of our acquisition of Maxia, now a wholly-owned subsidiary of Incyte. Maxia discovered a very interesting series of orally bio-available inhibitors and protein phosphates. These this has been a difficult area, but Maxia's chemists have had a great deal of success here.

And in addition to cancer, this class of compounds may have utility in treating metabolic diseases, inflammation and diseases in the central nervous system. Our two organizations complement each other well in this area. Maxia has promising proprietary molecules while we have a strong patent position in the area of protein phosphate tates (ph). Maxia brings to Incyte another class of novel compounds which may be useful in treating diabetes. These compounds which have reached the development stage in collaboration with Johnson & Johnson appear to be more selective and potentially more effective than several existing therapies. As we stated in today's press release, the Maxia team will remain in San Diego, Magnus Fall (ph) Maxia’s Chief Scientist will now report to Bob Stein. Bob has worked closely with Magnus and his team and I'm confident that our alliance with Maxia will accelerate our progress in drug discovery. I think it's fair to say in 2002 we've been very productive on the drug discovery side of our business.

I'm sure this year we'll be no less ambitious or important. Our plans for the year include completing staffing for our drug discovery efforts, launching at least one new drug discovery program, and moving at least one compound into clinical development. As our programs and products mature and become more visible, we expect to have more news to report, including peer review publications, initiation of clinical trials and ultimately clinical results. We've made meaningful progress this year not only in drug discovery, but also with our information business, despite the difficult year. Our revenues declined in 2002, reflecting industry consolidation in a tough economic environment. Eventually, many of our existing and potential customers, while focusing more of their R & D budgets on late stage development programs and clinical compounds, they also realize that's long it's going to take longer than expected to turn Genomic information into therapeutic products. We have responded to these challenges by cutting costs and improving our products.

We've reduced excess production capacity last year and cut operating costs by approximately $88m and headcount by more than third. We have restructured certain departments, consolidated facilities, launched a new content plan for our flagship product and focused our energies on our most important products and business opportunities.

These were prudent measures to support products which still have great value. Having said that, the market for genomic and proteomic information has changed and we must adapt those changes with the understanding that selling information products is not an easy business and the future is hard to see. For these reasons we've set our 2003 revenue values at $50m to $70m.

If we hit the high end, the information products will be cash positive. If we come in at the low end, we'll have to make further spending reductions to operate in a cash positive manner. Another area we work in opportunistically and collaboratively is the discovery and development of therapeutic antibodies. In this regard, let me tell you that we have had two more pharmaceutical companies entering into agreements that allow them to license, take licenses under specific anti-body patents.

In addition one of the companies has asked us to work with them to identify and characterize further anti-body targets which could be licensed for development. We expect this activity to continue in 2003.

Now I'd like to turn the call over to John Vuko to review the numbers after which I'll make a brief closing remark and then we'll open up the call to your questions. John?

Thank you, Paul. Revenues for the fourth quarter of 2002 was $21.1m compared to $54.8m in the fourth quarter of 2001. Our exit from the custom genomic product line in 2001 accounts for approximately $6m of the reduction in revenue. Remainder of the reduction related to lower information product line revenue, due to the continued shift in R&D spending, our pharmaceutical and biotechnology companies.

We do not anticipate that this slowdown in spending on genomic information will reverse itself in 2003 and have factored this trend into our guidance, but I will discuss this in a few moments.

Our net loss was $67.5m or $1 per share. This loss includes $35.7m of costs associated with our previously announced restructuring. $9.2m of costs related to taking write-downs on our long-term investments in other companies, and $1.5m in expenses related to statement of financial accounting standard 133 for lower evaluation of warrants we hold in other companies. Our cash position remains strong as we ended the year with $429m a bit higher than our previous guidance. Research and development expenses were $33.5m or $17m lower than the fourth quarter of 2001.

The decrease in R & D expenses reflects the elimination of costs associated with the custom genomic product line and our recent restructuring activities, combined with increased spending for our expanded drug discovery efforts in Delaware. Selling general and administrative expenses during the fourth quarter were $8.1m, a $9.5m reduction from 2001. Lower litigation, sales and marketing and infrastructure costs account for the majority of the reduction.

Interest income and other income and expense net for the fourth quarter of 2002 includes the $9.2m of write-downs to the investments we hold in other companies. To date related to our previous announced share repurchase program, we have repurchased $1,135,000 shares of our common stock. Now, looking towards 2003, our guidance for revenues in the range of $50m to $70m as Paul previously mentioned with a net loss of $58m to $100m. Our guidance for net loss does not include any acquisition related write-off associated with the purchase of Maxia Pharmaceuticals such as in process R&D, amortization of intangibles, et cetera.

We just completed the acquisition of Maxia and it will take a bit longer to finalize the acquisition entry. Additionally the net loss guidance excludes any statement of financial accounting standards 133 charges and write-downs of our long-term investments in any other companies. We cannot predict how the financial markets will value companies in which we have equity positions so we have excluded any potential future impact of valuation changes from our guidance.

We expect our cash position at the end of 2003 to be between $305m and $320 million. That concludes my prepared remarks. I will turn the call back to Paul.

Thanks John. Let me close by saying that I'm extremely pleased with the rapid progress we've made in establishing a fully integrated and competitive drug discovery team. In less than one year, we've been successful in attracting highly experienced and talented research scientists. Already they've made incredible progress in identifying and optimizing lead compounds as I've described earlier. Their pace is significantly faster than anything we were able to achieve at Mecur(ph) and Dupont.

I believe this level of performance indicative of their skill, focus and tenacity, all of which bodes well for the future. I look forward to keeping you informed of our progress and I remain confident in our ability to succeed as my colleagues and I have done before. I thank you for your attention and would like the operator to open the call to your questions.

Thank you, sir. Ladies and gentlemen the floor is open for questions and comments. If you have a question or comments, please press the number 1 followed by 4 on your keypad. If your question has been asked and you would like to remove yourself from the queue president the pound key. Questions will be taken in the order in which they are received. We ask when you pose your question to pick up the hand site to provide optimum sound quality.

Our first question comes from Mirav Choba (ph) with UBS Warburg.

Hi it's Derik DeBruin (ph). You've made a lot of progress in organizing the company from information play to the discovery program. It’s very impressive what you’ve been able to achieve this year. Just one general question I have is in terms of do you still intend to repurchase shares and I -- I'm just wondering why your repurchasing shares as opposed to buying back from the convertible debt.

This is John Vuko. Yes, we will continue our share repurchase program. At this point in time, as we look at the convertible debt versus the shares, we find the shares of particular value at this point we're focusing on. As you know, we have repurchased $30m or there about of our converts in the past. So we're mindful of both of these instruments.

Thank you.

Our next question of the afternoon comes from Alan Auerbach (ph)with Wells Fargo Securities.

Yeah, I have several questions. First of all, with respect to the '03 revenue guidance, can you state how much you anticipate will be database revenues versus partnership program revenue?

Alan, this is John. We traditionally have kept those numbers in a consolidated fashion, and we look to continue to do that at this point in time time. Suffice it to say that the strong majority of that is database subscription revenue.

Okay. And with regard to the expenses going forward, looking at the R&D levels and G&A expenses in the fourth quarter, are those levels good core base levels to grow off of going forward or are there some, you know, one-time charges in there?

There -- the fourth quarter still includes some of the costs that are related to those items or those expenses that were restructured since the restructuring did not take place at the beginning of the quarter.

Okay.

I think that all in all they serve as a relative fair base but they both have some adjustments for the obvious reason that they include costs that are no longer with us. As far as proportionally between the two, it's in the right basic ballpark.

Okay. And on the other income line of the income statement, is there any one-time items in there?

That's where we have the $9.2m of write-downs in investments that we carry in other companies.

Okay. And final question, regarding Maxia --, if I'm correct, they have a diabetes drug that they have partnered with Johnson & Johnson. Are we going to hear anything more about that drug in the near future?

We -- because we're in a collaboration, Alan with Johnson &Johnson and they have responsibility for the development of the compound, we are -- we're -- we're somewhat limited in what we can say, unless we are -- we have a consensus with Johnson & Johnson.

As you know, big pharmaceutical houses don't even like to talk about a compound until it's into phase 2. Suffice it to say, we're optimistic that -- from conversations we've had with them, that they are excited about the -- this class of compounds. There are two, actually. They have a second one that's a backup behind the first, and we are looking forward to seeing those compounds progress rapidly in demand. Having said that, I can't give you a date that would have to come from Johnson & Johnson.

Okay. All right. Last question, regarding the anti-body licensing collaboration that you've entered into, are we going to hear anything more about that at any time or is that also something that's being kept confidential?

The two companies who have entered into these agreements with us have for the present time asked us not to give out any more information than we gave you.

Okay. Thank you.

Once again, ladies and gentlemen, if you have a question or comment, please press the numbers 1 followed by 4 on your keypad. Our next question of afternoon comes from David Witzke (ph)of Morgan Stanley.

Thank you. Can you discuss the R&D headcount distribution among Polo Alto (ph), Delaware and at Maxia and provide us the percent of R&D being invested in the database and other non-drug discovery businesses?

Yeah, I'm going to ask Bob Stein to respond to that.

Can you hear me all right?

Yes.

The bulk of our drug discovery effort is based in Delaware where we have just over 100 people about evenly distributed between biology and chemistry. We have an additional 25 people engaged in drug discovery in the Palo Alto area. And the Maxia addition brings another 27 drug discovery scientists of whom 7 are chemists. With regard to the overall expenditures for R&D for the either the information nervous products or the drug discovery products, the expenditures are roughly comparable, if you look at all of the expenditures on the information side versus the discovery.

On the information side, are you committed to maintaining that being cash flow positive should the revenues fall on the lighter side of guidance?

In the remarks I made earlier earlier, Dave, we tried to imply that that is our intent, if we were coming in on the low side of guidance, that we would be looking for expense reductions to maintain cash flow positively.

Final question, if I can. Have you disclosed the specific Chemo-kind receptor you are working on? The schedule is advancing impressively. What capabilities do you need to do to move that into preclinical development?

We have not. We have not referred to the specific chemo-kind receptor. It would be our intent to do that at the time we have a compound get through pre- clinical [inaudible] which we hope will happen this year. For competitive reasons, and a appreciate you saying that because I think we've made remarkable progress. The compounds we have are very interesting compounds. The other part of the question, could you give me the other part again?

The preclinical capabilities.

We have what we need. We don't -- we would not -- we have a very fine group of pre-clinical drug metabolism folks who have been instrumental in the progress that we've made. We do not have in house any toxicology people, but we would as most smaller companies do, utilize a toll CRO safety group to do that.

At the time we enter into safety safety, we would consider bringing perhaps one person in to be our internal monitor of that. We have the added luxury of Bob Stein and I both having responsibilities for safety assessment. I did at Merckk and he did at DuPont. It still might be prudent to have an internal person whose full time job would be to ride herd on a CRO organization.

The other place that we don't have internal capability is in pharmaceutical R&D, which would be like in, you know, formulation. We have good relationships with a company that was formed from people who left DuPont pharmaceuticals and worked for us in the past and who are right up the street from where we currently are, whose real strength is in making formulations rapidly for both preclinical safety and for early clinical studies, phase 1, phase 2 studies.

We don't feel that we have to bring any of that expertise in-house. I think we're pretty well set to continue to move rapidly and what we really need right now is just a little tweak of our current lead structures to get us to the point that we feel comfortable putting something into formal preclinical development.

All right. Thank you.

Once again, ladies and gentlemen, as a final reminder, if you have a question or comment press the numbers 1 followed by 4 on your keypad. Our next question comes from Craig West with AG Edwards.

Hi, good afternoon, everybody.

Hi.

I had sort of three questions here. First is, we've spoken a little bit before Paul and we're talking about the size of the company and the way you think about what we think of as slots for discovery programs and I see, obviously you're focusing on cancer and anti-inflammatory and potentially CNS activity. I was wondering, when you look at what you've got, how many programs do you picture yourself as having now? Do you still think of seven as the number you are targeting and where might you go from here?

Well, Craig, we've always said we're interested in the central nervous system diseases. Because we feel that although some people in the sector want small companies to focus and target in on one therapeutic area, it's very limiting and I think it's dangerous to a degree to do that unless you are pretty sure you have a winner. CNS has been something we've talked about. We don't have any programs at the moment.

The two programs that we said we would emphasize and we continue to do so are inflammatory and cancer. And with the acquisition of Maxia, what's logically come out of that is an increased interest in metabolic disease, diabetes and obesity, in particular because they have a program that's far advanced in the J & J collaboration.

Okay. So you have the opportunity to do both CNS and metabolic sort of in your own house, you're thinking?

Well, we're saying right now we are doing inflammation and cancer. We are inheriting a program which we think has a lot of potential in the metabolic disease area, and we remain open to something in the CS area if it were interesting and would not -- and would not be something that would strap us financially or lead to a defocusing on what we regard as our primary areas of interest. And Bob Stein wants to add to my comments.

Craig, with regard to your question about how many programs we think we can run, perhaps and have in place by the end of 2003, we're looking to add another one or two programs. At steady state we may be running 5 to 6 programs that may be full fully staffed and maybe something more exploratory at a lower level of resource.

That's helpful, thanks. And I was -- I've got a couple more if there's time here. I was wondering, you have in the past given us, you know, the whose who list of pharmaceutical companies that are your customers. Can you tell us a little bit about what your customer list looks right now?

How do think about renewals can you give us a sense of that? Your second and final would be be -- you mentioned there are obviously bottle necks between genomic information and drugs on the market. Certainly the market in the year 2000. Can you tell us what are you hearing from your customers in terms of the bottle necks they are running up against and what are they telling you guys that they need help on?

Okay, on the first of the two questions, we have in the past referred to companies that at one time or another or currently are customers, but we never in a given point in time indicated who our customers and who are not. And there is disadvantages to us competitively and in renewal discussions to do that. So I'm going to decline to get into any more detail on that. The second question, Bob, do you want to deal with that one?

Let me just say that there are -- there is a lot of interest and a lot to be gained from the again genomic information that we provide.

We are beginning to make a lot of use of it ourselves. I think that less of the value is coming from the identification of large numbers of fully validated targets. I think that's a much harder quest than people had hoped. Having a complete view of the genome allows you to understand when you work on a target, what the related protein are that your compounds might accidentally interact with and helps you do better discovery on optimizing the compounds.

On the front of therapeutic proteins, it's been much more difficult than people had hope to identify the next [inaudible] the next interlukeen (ph) 2. On the other hand, there is a lot of interest and early progress on identifying anti-body targets of potential interest in both cancer and inflammation. So many of the promises that people were looking to be fulfilled are coming forward, but some of them are just more difficult to crack than people originally anticipated. And some of the progress will definitely come but it'll be on a slower time than people had originally thought.

So the -- having the genome spit out target after target isn't happening, but you are seeing good progress on specifically anti-body targets?

Anti-body targets are of interest. There are other targets that are emerging you it just takes more work has to be real laboratory base work. It can't [inaudible]your crumbmatic (ph) Work to qualify targets.

But having the complete list of characters and cast of characters is very helpful at the outset and the types of collaborations that we have with Lexicon where knockout information can be used and the newer technologies for removing the effects of specific gene products like SIR are becoming very helpful in vitro studies. I think it is coming forward it's just harder [inaudible] people but it might be in the year 2000.

Thanks very much.

At this time I show no further audio questions. I would like to turn the floor back over to management for closing comments.

We would just like to thank you all for dialing in and listening and we look forward to speaking with you again in the near future. Thanks very much and good afternoon.

Ladies and gentlemen, we thank you for today's participation. You may disconnect your lines at this time and have a pleasant evening.