英賽德 (INCY) 2003 Q1 法說會逐字稿

Welcome, ladies and gentlemen, to the Incyte Corporation first quarter 2003 financial results conference call. At this time all participants have been placed in a listen-only mode and the floor will be open for questions and comments following the presentation.

It is now my pleasure to turn the floor over to your host, Pam Murphy. Ma'am, the floor is yours.

Thank you, and good afternoon. Thank you all for joining us.

With me today are Paul Friedman, Incyte's Chief Executive Officer, Robert Stein, President and Chief Scientific Officer, John Vuko, Chief Financial Officer, and Lee Bendekgey, Executive Vice President and General Counsel, and as you saw in the press release today, acting General Manager of Incyte's information products division.

In terms of our format for the call, Paul will begin with an overview of the quarter followed by John Vuko, who will review the first quarter financial results. Lee Bendekgey will then discuss the information products and his new role as acting General Manager. Bob Stein will follow with a review of our drug discovery programs. Paul will then open up the call for questions.

Before we begin, we would like to remind you that the statements management will be making during this conference call are likely to contain predictions, estimates, and other forward-looking statements, including, but not limited to, future objectives for and expected operation results of the company's information products, 2003 financial guidance, efficiencies to be realized by operating drug discovery and information products separately, and progress in and plans for our drug discovery efforts, including potential development candidates and anticipated development time lines.

These forward-looking statements and all other statements that may be made in this call are subject to a number of risks and uncertainties that may cause actual results to differ materially. We encourage you to see Incyte's 2002 Form 10-K, the press release issued by Incyte earlier today, and Incyte's other filings with the S.E.C.

Now I will turn the call over to Paul Friedman.

Thank you, Pam.

I'm pleased to report that the first quarter of this year was very productive for Incyte's drug discovery group. It has continued to make excellent progress in advancing our proprietary drug discovery programs. Today we have three such full-scale discovery programs, one in inflammation and two in cancer. And we've assembled a team of over 130 research scientists who are moving them forward.

In a few minutes Bob Stein is going to give you a brief update on their activities and review the status of our most advanced discovery program. You'll hear that we've made great strides in the past year.

While the market for our information products continues to be challenging, first quarter revenues were in line with our expectations and we continue to believe that Incyte's information products provide access to the most comprehensive genomic and proteomic databases available. As I mentioned on our last call, we are committed to making these databases ever more user friendly and more pharmaceutically relevant, and we'll do so throughout 2003. Thus far, we've issued two new releases of the LifeSeq Foundation database, although neither were in place until well into the first quarter.

Also, given that it is a very competitive marketplace, we've revised some of our pricing strategies to meet our customers' needs, to bring new subscribers on board, and to retain existing customers. Given the realities of this competitive marketplace, as well as the study growth in our drug discovery programs, at its April board meeting Incyte's Board of Directors recommended that we make specific changes to the information products organization that will allow Bob Stein and me to focus more of our time and energy on the drug discovery part of our business.

I believe this move is appropriate as we pursue our broader mission to discover and to facilitate the discovery of new medicines, and that it will serve the best interests of employees, customers, and shareholders.

Lee Bendekgey, Incyte's General Counsel, is now acting General Manager of the information products, and he'll have responsibility for all of the information business operations. Lee's been with Incyte since 1998. He's played a key role in supporting the growth of our information business, while helping Incyte create a leading genomic intellectual property portfolio. He and I will work together to determine whether additional management resources may be needed to support Incyte's information group in the months ahead.

Lee will be working with a very talented and dedicated management team, all of whom have significant experience with the information business. This team includes Ken Jacobsen, Executive Vice President Information Sciences, Richard Gould, Senior Vice President and Chief Genomic Scientist, Jim Merryweather, Executive Vice President, Business Development and Commercial Operations, and Ward Davidson, Vice President Business Development Information Products. In a few minutes, Lee will discuss in more detail the information business and his team.

That concludes my introductory remarks. I'll now turn the call over to John Vuko, who will review first quarter financial results.

Thank you, Paul, and good afternoon.

As Paul previously mentioned, revenues for our first quarter, which were within our expected range, were 12.5 million, or 16.5 million below the prior year. Subscription-related revenue continues to provide the vast majority of our revenue with licensing activity providing the bulk of the remainder.

While the market for Genomic information continues to be competitive, the improvements to LifeSeq Foundation and a more flexible approach to pricing have been well received by our customers. Additionally, our bioknowledge library database continues to be in demand. I also believe the new management structure that Paul mentioned will help improve the operational and financial results of the information products.

Our net loss for the quarter was 55.8 million, or 81 cents per share. The loss includes a 28.1 million write-off of in-process R&D related to our purchase of Maxia Pharmaceuticals, 1.1 million of increases to previously established restructuring reserves, and a 1.9 million write-down of a long-term investment. Including these items, our net loss was 24.7 million, or 36 cents per share, which was within our expected range.

Research and development expenses for the first quarter totalled 30.2 million, or 3.5 million less than the first quarter of last year. Selling, general and administrative expenses were 7.4 million, representing a 52% decrease from the first quarter of 2002. The decrease reflects the lower expense structure that resulted from the restructuring that we announced in November of 2002 and lower litigation and severance costs.

Also included in operating expenses, is approximately $5 million of depreciation and amortization expense. Interest and other income and expense net includes a $1.9 million write-down of one of our long-term investments.

Our cash and marketable securities ended the quarter at $376 million, reflecting a $53 million reduction. This reduction, which we anticipated would be disproportionately large compared to the entire year, included the following items: the completion of our purchase of Maxia Pharmaceuticals, which consumed approximately $4 million, payments for our restructuring-related liabilities that totalled approximately $12 million, of which 2 million related to ongoing lease obligations and 10 million for other specific liabilities, accrued compensation payments of approximately $4 million, semi-annual payment of interest on our convertible notes of approximately $4 million, and capital spending of $5 million, of which more than 2 million was accelerated into the first quarter to take advantage of a financially attractive opportunity.

Even with the cash consumption for the first quarter, we still anticipate that our cash and marketable securities balance at the end of 2003 will be in the previously announced range of $305 to $320 million.

I will now turn it over to Lee.

Thanks, John.

Today's announcement that we are creating separate management teams with clear accountability and a narrower focus will allow Paul, Bob and the other leaders of their discovery team to focus their talents, and will allow me and the rest of the information business management team to focus our attentions on the success of that business.

Incyte's information business is currently operating in a difficult environment, partly because both the public efforts and those of private companies like Incyte have succeeded in addressing what previously was a shortage of drug targets. What customers now need is information that allows them to better characterize and prioritize targets that are available to them.

We have assets that should allow us to continue to lead in this new environment, starting with our franchises, the leading supplier of information about genes and proteins, and our ownership of the most complete catalog available of genes and proteins. This catalog has the potential to provide the basic encyclopedia by which genes and proteins are named and discussed. In an environment in which it's not easy for researchers even to confirm that they're talking about the same genes, this type of resource has important value.

To make our database business more successful, we now need to build on these assets to better address the needs of researchers to sift through large volumes of data to prioritize the many potential targets that Incyte and others have discovered over the last decade.

To accomplish this we need to implement the following. First, to provide enhanced gene characterization. Second, provide expanded functional annotation of genes and proteins, particularly to enable researchers to stay abreast of available information regarding targets of potential interest. Third, reach a broader audience for our database products. Fourth, license our IP to benefit from our position as the leading commercial holder of genomic IP. And fifth, grow revenues and manage expenses so that we operate the information and IP activities in a cash flow positive manner.

We look forward to communicating our progress on these goals to you over the coming months. With that, I'll turn the call over to Bob.

Thank you, Lee, and good afternoon.

I feel excited about the drug discovery team we have assembled at Incyte because I am convinced of their excellence. I know, and have worked with, many of our scientists previously at DuPont-Merck Pharmaceuticals. They represent the cream of that highly productive organization. Additionally, we have attracted some of our industry's best chemists and biologists to join us at Incyte.

Our team of more than 130 scientists includes over 55 chemists, and has all the requisite expertise and talent to carry out state of the art drug discovery, building on our strong expertise in , pharmaceutical biology, and all aspects of medicinal chemistry. They have quickly gelled as a team and have hit the ground running.

The leadership team brings considerable pharmaceutical experience that's hands-on and a track records of demonstrated successes in drug discovery and development. This assemblage of talent, competency, experience, and enthusiasm gives us a distinct competitive edge, enabling us to select compelling targets and to create high-quality drug candidates rapidly. By any standard, our progress on our initial programs has been remarkably rapid without sacrificing quality.

I'd like to briefly update you on our most advanced program aimed at inflammatory diseases. We are seeking orally active small molecule antagonists of CCR2, one member of the family of chemokine receptors. Chemokine receptors are expressed on inflammatory cells and mediate the responses of cells such as lymphocytes and monocytes to various small peptide mediators of inflammation known collectively as chemokines.

Despite the fact that we first had labs and our team assembled only a year ago, we already have several novel proprietary CCR2 antagonists, which we believe are suitable for development as orally active drug candidates. There is strong evidence from studies with knock-out mice missing CCR2 that our compounds ought to be effective in settings such as rheumatoid arthritis, chronic inflammatory bowel disease, multiple sclerosis, and possibly, atherosclerosis.

While CCR2 is a G protein coupled receptor, it has been seen to be a difficult drug discovery target. The rapid progress that Incyte's drug discovery team has made on this target illustrates their talent and experience. We now have orally active small molecule CCR2 antagonists that block inflammation in rodents, mimicking this CRR2 knockout phenotype. Furthermore, we have shown that our CCR2 antagonist can block inflammation in primates after oral administration. These results are highly encouraging.

Paul Friedman will present data from this program tomorrow at the Deutsche Bank Healthcare Conference in Baltimore. These are the first demonstrations that antagonizing CCR2 with a small molecule blocks inflammation in animals. They provide evidence for potential utility of Incyte's CCR2 antagonists in treating chronic inflammatory conditions with a novel oral therapy. We expect to nominate CCR2 drug candidates for preclinical development in mid 2003. If they progress well, we should be in human clinical trials next year.

I will now turn the call back to Paul for closing remarks.

Okay, Bob. Thanks.

So, I think you can tell that this has been a productive quarter. There's a great deal of enthusiasm here for our chemokine receptor antagonist, and the move to create separate management teams for the information products and drug discovery stands us in good stead going forward. I'm confident we'll continue to make meaningful progress this year and that that will translate into sustainable value for shareholders, customers, and patients.

And with that, I'd like to open up the call for questions.

Ladies and gentlemen, the floor is now open for questions and comments. If you have a question or a comment, please press the number 1 followed by 4 on your touch-tone phones. If your question has already been asked and you would like to remove yourself from the queue, please press the pound key. Please note that we do ask that you pick up your handset while posing your question to provide optimum sound quality.

Our first question of the evening comes from Meirav Chovav with UBS Warburg.

Hi. Actually, it's Jeff Meacham.

I'm just wondering if you guys can give us some color as to what drove the sequential decline in revenues? It went from 22 to 12 million this quarter.

And then, of that 12 and a half, what represents, sort of, a core base from existing customers for the balance of the year?

Yes, the decline that you're commenting about was predominantly in the subscription side of the business with subscription revenues, although they still represented the vast majority of the 12.5 million that we reported.

As to the core going forward, we certainly look at our revenues staying at, or increasing, from this level going forward. But as far as a core piece, we really don't get into how much of our revenues are committed by way of specific subscriptions.

Okay. And how much flexibility do you have in the cost structure, if you need to scale the database business, as you discussed?

Okay. I'll address that question. This is Paul.

We, as I think I said on the last call, we continued to look at ways that we can take expense out. The restructuring that we did last year, I wouldn't call it low-hanging fruit, but what was there were costs that we felt could be taken out immediately without impacting our ability to put an excellent product out the door. And what we've gone to now is a mode where we have looked at other expenses that can be taken out, but they're not ones that you can just turn off the switch and walk out. They're things that have to be gradually phased in and phased out. And we're in the process of doing that.

And as I also said, when we gave guidance, if we come in at the top of our revenue range, we -- without doing anything further, although we're gonna take cost out if we can take cost out, we would be cash flow positive. If we come in at the lower end of the guidance range, we would have to implement the changes that I've been describing to you in general terms, anyway, to be cash flow positive. So, there are other things we can do. They're just things that require some thought as to how to phase them in and phase them out.

Sure. And then, just a real quick follow-up. In terms of the drug discovery side of things, what kind of metrics should we be looking for to gauge your progress? I mean, obviously with the CCR2, that's showing some progress, but should we expect to see publication of some targets, maybe a presentation, you know, at medical meetings and such?

Bob, do you want to answer that?

Yeah. Thank you. This is Bob Stein.

I think that there will be presentation of some data in Paul's Deutsche Bank presentation tomorrow. And the data are of suitable quality for presentation at scientific meetings, as well. So, that's part of it.

I also think you should look for several compounds out of our internal programs moving into preclinical development this year. And to reiterate, that's a remarkably short time frame to have elapse before we got to that point, considering how recently we started the operation.

To also add, we have committed in our objectives, which we have presented in the past to, in one way or another, have a compound in the clinic before the end of the year. Whether that is an end license compound or an internal compound remains to be determined. But we are committed to doing that, to having a second compound enter preclinical development.

And we also have committed to end license at least one compound that is in the clinic and to have four internal full-scale programs running by the end of the year. So, those are, I think, some fairly discreet metrics by which you can judge us throughout and at the end of 2003.

Great. Thanks a lot.

You're welcome.

Our next question comes from David Witzke with Morgan Stanley.

Thanks for taking my questions, some of which have been answered.

I guess, Paul or Lee, on the information business, can you kind of just describe the deal environment, both for renewals and, I guess, new sign-ups, what you're seeing and any color you can give us on, you know, the size of the deals? I know they used to be 15 million three-year deals. I'm sure you're not giving those economics today, but any color.

Lee, do you want to take that, please?

Sure. Yeah, I won't go into detail in terms of the size of the deals, Dave, for reasons that you can understand. But as you indicated, it's a competitive environment out there, not so much in the sense that, you know, we got a lot of other commercial entities selling databases to customers, but because primarily, we're competing against reduced budgets in drug discovery organizations and big pharmaceutical companies.

And what they're really looking for is -- you know, they still want access to targets and they still want access to IP, but increasingly what they're looking for is information that helps them to prioritize their products -- their targets, as they look at making their pipelines as productive as possible.

And one of the things that we have noted, with pleasure, in an otherwise difficult environment, is that in that regard, you know, we're experiencing strong pull for the proteome product. People really see a lot of value to a product that allows them, in a convenient sort of way, to see what's been done on a particular target and to, you know, to either prioritize the target up after looking at it as one of potential interest, or eliminate it quickly if it turns out that the data available out there suggests that it is not appropriate for their needs.

So, that's kind of, you know, that's sort of the overall character of the market right now. It's shifting, and people, you know, are less interested in necessarily seeing the next kinase, but they're interested in making sure that they have the complete set of kinases at one level, and then they're particularly interested in some of the proteome-style data.

Okay. And looking at, I guess, your 12.5 million into the first quarter, or so, puts you at a run rate of 50 million, is that a good baseline? Is there seasonality in recognition of revenues?

For reasons that -- it's not in terms of recognition, but for reasons that have always, sort of surprised me, it may have to do with pharmaceutical companies spending their budgets at the end of the calendar year and then recovering. Q1 has traditionally been sequentially down from Q4 for us for the last -- basically since I've been with the company.

And the other thing that -- so, yes, we do see this as a base from which we would expect revenues to grow going forward this year. And the other component that that affects revenues in any particular quarter is the IP licensing component, which we expect to -- you know, it's sort of lumpy. But it wasn't a big lump in Q1, and we're hoping it's a bigger lump in some of the future quarters. We've got a bunch of deals that we're working on in that regard.

Okay. Thanks. And on the therapeutic side, I guess the first question on head count, I believe, is it about 130 in the split between chemists and biologists, and where does that need to be in, say, 12 months?

We're fairly nearly completely staffed on our drug discovery efforts. We may add a little bit of chemistry as we go forward. There is a small, incremental head count planned to take into account the development needs, although we don't plan to put a big infrastructure in place for that. We plan to manage that through our internal expertise and outside CROs. So, we don't plan to have a large incremental add in discovery. I think we're pretty much fully functional.

Okay. And plans for the Maxia infrastructure, is that -- any change there?

I think we're looking for ways to consolidate and get the best integrated drug discovery efforts that we can put in place.

Very good. Thank you.

Thank you, Mr. Witzke. Once again, ladies and gentlemen, as a reminder, if you do have a question or a comment, please press the numbers 1 followed by 4 on your touch-tone phones.

Our next question comes from Alex Hittle with A. G. Edwards.

Good afternoon. I was wondering if we're going to see separate financials for the two business arms, perhaps not in releases like the one you issued today, but perhaps in the 10-Ks and 10-Qs?

John?

We will be providing additional visibility into the expense structures. The exact form of the financial reporting we'll still be working out, but we certainly will be providing greater visibility into the costs of the two separate organizations.

Okay. And secondly, I've wound up here a bit confused about what you've got going in terms of number of drug discovery programs, what will come into the clinic this year and where that will come from, and what we can expect, then, in '04 and where that will come from. Can you walk us through that slowly?

Yeah. We've made a commitment to have a compound that belongs to us in the clinic before the end of this year. It's unlikely, if you go through the time lines on the CCR2 program, that it will come from internal drug discovery, okay?

Okay.

We're committed to finding a second such compound to end license, okay?

Okay.

In 2004, hopefully both of those yet to be announced entities will be in the clinic, as will preclinical safety permitting, a CCR2 antagonist, at least one CCR2 antagonist. And in the second half of 2004, if we are -- further have good fortune with the program that sits behind CCR2 internally, we could have a compound moving into man toward the end of '04 from that program.

So, you'd have two CCR2s?

One or two. No, it's a different program. We have a program -- we have two -- we have several other programs. As we said, two in the cancer area. And from one of those programs we are cautiously optimistic that we will have a compound that will reach man, Phase 1, toward the end of 2004. So, we have CCR2, internal cancer program, and two compounds that we will end license that will be in the clinic when we get them, or certainly before the end of the year.

Okay. That's helpful. Thank you.

You're welcome.

Hi, folks. It's Craig.

As a follow-on to Alex's question, we've asked and talked to you guys before about the, sort of, full plate number of programs that you think the firm can support. And that number was 7. I wondered if it still was?

And then, secondly, the press release mentions additional licenses to your intellectual property portfolio. And I wondered if you could give us a little more color on what those might be?

Okay. Well, Lee can handle the latter part of the question.

The former part of the question is, as we look at optimal models for the number of internal programs and the number of end licensed entities, the number we continually come back to is 7. The exact mix of how many internal programs and how many ends license programs, I think, requires us to remain somewhat flexible and opportunistic based on what's out there and what happens with a pilot internal program. But the number 7 is a reasonable number.

Okay.

Lee, can you address the second part of the question?

Yeah. The second part of the question relates to the intellectual property portfolio and the licenses to which Jim Merryweather refers in his quote. And those are-- the biggest category to which Jim is referring, are people who are interested in licenses under our antibody IP for the purposes of developing and commercializing therapeutic antibodies. So, that's predominantly what that refers to.

Okay. Thanks so much.

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

Okay. This is Paul. I appreciate your attention today.

And in closing, I actually wish we could have taken you through, which is difficult to do in this forum, the very, very interesting data we have vis-a-vis the CCR2 program. I'm going to be presenting that in some detail tomorrow in Baltimore, and if you can listen in on the webcast, that would be great. If not, I hope I have the opportunity to show it to you personally sometime in the near future.

We're very high on that program and believe it has a tremendous amount of therapeutic potential. And I think we've also leapfrogged many companies, including a number of big pharma companies who have struck out from a medicinal chemistry standpoint, vis-a-vis that target.

So, thank you all, and I look forward to speaking to you all again in the near future. Bye-bye.

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