英賽德 (INCY) 2003 Q2 法說會逐字稿

At this time, I would like to welcome everyone to the Incyte second-quarter 2003 financial results conference call. All lines have placed on mute to prevent any background noise. After the speakers' remarks, there will be a question and answer period. (CALLER INSTRUCTIONS). Ms. Murphy, you may begin your conference.

Good afternoon, and thank you for joining us. With me today are Paul Friedman, Incyte's Chief Executive Officer; Robert Stein, President and Chief Scientific Officer; Lee Bendegkey, Executive Vice President, General Counsel, and General Manager of Incyte's Information Products division; and John Vuko, Incyte's Chief Financial Officer.

In terms of our format for the call, Paul will begin with an overview of the quarter, followed by Lee Bendegkey, who will give an update on recent developments with Incyte's information products. John Vuko will then review the second-quarter financial results. From there, we will open up the call for questions.

Before we begin, we would like to remind you that the prepared statements that management will be making during this conference call and statements made in response to questions are likely to contain predictions, estimates and other forward-looking statements that are subject to a number of risks and uncertainties that may cause our actual results to differ materially. Such statements include, but are not limited to -- those regarding plans for advancing our drug discovery programs and for advancing compounds into the clinics; plans for enhancing our information products and implementing related operational changes, revenue guidance, and the future profitability of our information products. We encourage you to see Incyte's quarterly report on form 10-Q for the quarter ended May 31, 2003, the press release issued for Incyte earlier today and Incyte's other filings with the SEC.

I would now like to turn the call over to Paul.

Good afternoon. Our second-quarter was productive. We have made substantial progress in three key areas -- reducing overhead, advancing our drug discovery programs and improving our information products. I would like to touch on the first two areas in my remarks, and then I will turn the call over to Lee Bendegkey, who will give you an update on our information products.

First, with regard to our overhead, we have worked hard in the past year to rationalize the size of our workforce, thereby reducing unnecessary expense, eliminating redundant operations and improving our operating efficiency. During the second-quarter, we have continued this effort by eliminating 52 positions from our drug discovery operations in San Diego and Palo Alto. We have now consolidated all of our pharmaceutical R&D activities in Wilmington, Delaware.

About half of this reduction came from closing the San Diego laboratories occupied by the former Maxia team. Those programs being run at Maxia have been shifted to Delaware, and the other half of the reductions came from the target validation group in Palo Alto. The wet lab activities of the target validation group in Palo Alto have also been moved to Delaware, allowing us to pursue and manage those activities more efficiently. These cuts will reduce annual R&D staff expenses by approximately $10 million.

The drug discovery organization organization now numbers about 130 scientists, and is likely to remain at that level for the foreseeable future. I should also mention that in August, we are moving our R&D activities to more permanent leased facilities in Wilmington at the DuPont experimental station.

This takes me to my second topic, discovery research. The team has made great progress with our most advanced discovery research program, which is focused on small molecule antagonists of a (indiscernible) receptor known as CCR2. In July, they identified a short list of compounds from the CCR2 program suitable for preclinical development. Over the next eight weeks or so, we hope to choose one or more compounds from this list for preclinical toxicology studies, and our objective is to identify a compound to take into human testing next year.

We believe the market for oral CCR2 antagonists is large. These compounds have the potential to treat numerous inflammatory conditions, such as rheumatoid arthritis, inflammatory bowel disease, multiple sclerosis and perhaps even atherosclerosis. Because of the success and shortcomings of the injectable TNF inhibitors such as Remicade (ph) and Ambril (ph), we believe that oral agents with potentially similar efficacy and fewer side effects would be well received, and represent an important medical advance in the treatment of inflammatory diseases. We look forward to reporting on our progress in the months ahead.

In addition to our internal drug discovery activities, we believe it is important that we in-license an additional clinical compound. This is one of our corporate goals for 2003, and while it is difficult to predict or to guarantee with certainty that we can succeed with this initiative, I am pleased with our current progress. I believe that we will be able to in-license a Phase II drug this year in an area we know well from past experience.

I will now turn the call over to Lee for an update on the information products business and a description of a new business plan that he and his team have developed, for which I have very high enthusiasm.

Good afternoon. It has been a busy and enlightening quarter for the information business management team. We principally focused our attention on strengthening our business this year and defining our vision for the future direction of our database offering. Since our last call, we have -- first, made many improvements to our LifeSeq foundation and ZooSeq databases, which now include access to the human protein volume of our BioKnowledge Library; we have also improved the performance and usability of the database software that is delivered with the databases. We have come close to completing the generation of body map gene expression data, and we have begun a targeted marketing effort to reach a broader customer audience, including an untapped biotech customer base for our database products.

As we look to the future, the challenge is to enable users to make sense of the explosion of genomic information so that they can stay abreast of rapid scientific developments, and so that those in commercial research organizations can prioritize most effectively among candidate targets. With our understanding of the marketplace, the curation process and the benefits of it through the BioKnowledge Library, and our proprietary content, we have developed a vision for our next generation product that meets this challenge and is a natural and logical evolution of our current products -- a biocurated information product offering that will be available to customers next year, and that we believe will become the standard reference source for information about genes and proteins.

Biocuration is a unique term, one that we have defined as the synthesis quality control and organization of all public and Incyte proprietary genomic and proteomic information, as well as the published literature. Biocuration will bring real value to our customers since it will provide researchers with the most comprehensive genomic reference for biological and pharmaceutical research. We recently previewed this concept to one of our pharma customers, and are pleased to report that it was received with great enthusiasm, which we believe reflects our appreciation for our customers' prevailing desire for a cost-effective help in prioritizing drug targets.

By completing our high throughput wet lab work this year, we will no longer require the organization and infrastructure to generate additional sequence data, which will significantly reduce our expenses, giving us additional pricing flexibility as we address the new needs of the current and emerging markets. With regard to the current fiscal year and revenue guidance for the year, we believe we can deliver revenues of 50-60 million in 2003. These revenues should come from a combination of existing LifeSeq subscribers, our expanding base of bio BioKnowledge Library customers, and from additional licensing agreements to RIP (ph). With the reduced costs we expect to realize as a function of becoming a smaller organization when we launch our new product, we believe the information products unit will be profitable in 2004. We are not yet in a position to provide formal guidance for 2004, as we are still working on pricing strategies, launch plans and market acceptance timelines.

I hope that I have shed some light on the exciting prospects ahead for this business, and look forward to updating you on our progress. That concludes my prepared remarks, and now I will turn the call over to John to review the numbers from the second quarter.

Good afternoon. As you saw in today's press release, revenues for the second quarter were 11 million, or 18 million below the second quarter of 2002. The decrease reflects the relatively soft market conditions that exist for database products and the impact of timing when licenses are taken on our intellectual property.

Our net loss was 26.9 million, or 37 cents per share, which includes $800,000 of write-downs related to long-term investments that we hold in other companies, and $300,000 of charges towards previously-established restructuring reserves. R&D expenses for the second-quarter of 2003 were 29.9 million, representing a 21 percent decrease from last year. This decrease reflects the savings from the restructuring that took place in November of last year, as well as our continued efforts to maximize the efficiency of our operation.

SG&A expenses for the second-quarter were $7.7 million, compared to 15.1 million in the prior year. The reduction in expenses from last year is primarily attributable to the restructuring and lower legal costs, principally from reduced litigation expenses. Interest and other income, net, includes the 800,000 of write-downs on long-term investments that I previously mentioned.

We ended the second-quarter of 2003 with over $360 million in cash and marketable securities, representing a cash consumption for the quarter of only $15.6 million. Thoughtful management of cash remains a top priority at Incyte.

That concludes my prepared remarks. I will now turn the call back to Paul.

I would now like to have the operator open the call for questions.

(CALLER INSTRUCTIONS). Derek Dublin (ph) from UBS

I'm curious -- you reported a cash burn of (indiscernible).6 million, yet the net loss was 26.9 million. I'm wondering where the -- what the difference is between the two numbers?

We had some meaningful amounts of non-cash charges for the quarter. If you would notice in the balance sheet, some of our prepaid expenses and other current assets have declined a fair amount from the end of the first quarter, so our loss includes a higher level of non-cash expenses than it has in the past.

What were the -- can you be more specific on the write-down in the investment, the 800,000?

It represents investments in companies -- it actually represents 2 write-downs on 2 different companies and private companies that we hold that we thought it was prudent and proper to take a write-down, given where they are at at this point in time with their finances.

This is (indiscernible). Another question is regarding your revenue estimates for the year. Your revenue estimate (indiscernible) actually imply an increase in the second half of the year relative to the the level in the third half and, obviously, in the second-quarter. So are you assuming a recovery of this business in the second half?

We are assuming, as I think I indicated in my prepared comments, we're assuming stability in the LifeSeq customer base, which we see. We are assuming a continued growth in our BioKnowledge Library subscriptions, which are also seeing very strong renewal rates, even among academics who signed up a year ago. And we have some IP deals in the pipeline that we think should enable us to get within the 50-460 million range that I described.

But if you look at the first to second, it was actually a decline. So did you see any of these trends this quarter?

I'm sorry, what decline?

There was a decline in revenue between the first --

Yes. We have not broken down the various components of revenue, but as I said, what we are seeing is stability now -- the stabilizing of the LifeSeq customer base after a period of decline there, and then we are seeing slow but steady growth in the BKL. And then the IT revenues, as you know, are somewhat lumpy. We have had quarters where we have done significant licensing deals, and so that continues to be the case; although there, too, we're starting to grow a somewhat steadier royalty stream.

Alex (Indiscernible) from AG Edwards.

On cash here, you have previously indicated you expected to finish the year out at about -- a little bit north of 300 million on the balance sheet. Is that still where you see things coming out for the year?

Yes, we do.

Second, can you give us an update on gene patents that you have received? Where does that intellectual property portfolio stand right now?

I'm sorry, I don't have specific numbers for you, but it continues to grow. And we actually this past quarter got our first patent allowed in Europe, where, as you know, things are several years behind, in terms of the filing strategy. So the portfolio is continuing to grow and we have been licensing it actively, and it is contributing to what I described as a growing royalty base.

And those royalties all will flow through as you view the Company sort of as two parts through the information technology side of the business? Is that right?

Correct.

On the CCR2, can you give us some thoughts on whether or not there is anything beyond convenience, as far as the attractions of an oral CCR2 inhibitor versus an antibody approach?

There certainly are safety issues beyond convenience, and there may well be efficacy issues; also the ability to combine. But if you have gotten a biologic, and you get an intracellular infection, you can't turn the biologic off. You can stop taking this, and 12 hours later the effect is gone. If you've compromised your ability to deal with intracellular organisms is always a problem, whenever you start to impact immunologic processes, and you see that with anti-TNF agents (inaudible) percentage of time. But the more you see reported, it looks like a real phenomenon. The other thing that you see in combination with (indiscernible ) is a low but real incidence of lymphoma, which you should not see here. So for safety reasons there are advantages here, and there are -- if you look at the cleanliness, and you have seen the data -- for example, the EAE model in multiple sclerosis -- when you absolutely see a dead blank nothing in the CCR2 knockout, and you don't see that with anti-TNF biologics. So there is the potential for improved -- better efficacy, there is the convenience, there's the price, and there are safety issues. So I think there are a whole series of reasons -- assuming that we are able to get through preclinical (indiscernible) and in demand, and get the right PK -- that the knockouts suggest we should see some very interesting results. Bob Stein, would you like to add anything to that?

I think that is a very good list that you have articulated. And in addition, our compounds are small molecules, and they can reach into places in the body that the antibodies are approaching but can't necessarily reach, and they can therefore reach sites of inflammation that otherwise might not be handled well by the biologics. And we can actually see some of that when you study and compare the small molecule approaches and the biologic approaches in animal models -- I would say, arthritic diseases.

Michael Schicter (ph) from Mentor (ph) Partners.

Just looking at your balance sheet, I was wondering if you had purchased any more bonds during the quarter or after the quarter closed, and what you plan on doing about the bonds that are out there, given the yield?

We did not purchase any of the bonds in our second-quarter; however, in July, we have purchased a little under $4 million at face value on our convertible notes.

May I ask what you paid for them?

We would like not to discuss that point, as it does not work in our favor. But we certainly purchased it at a nice discount.

Do you plan to continue to purchase, or at some point maybe call (inaudible) go after the whole issue?

To the first part of your question, we really view this as a bit of an opportunistic path that we are taking, and the decision whether to go beyond that is a decision that has not yet been made. So we are opportunistically buying them as we see an attractive offer to us.

Has a discussion at least been held about possibly going beyond opportunistic (inaudible) --

Yes. We have had many internal discussions, but we have not yet decided the path that we wish to take, and we are not in a position to discuss that at this point in time.

But you are cognizant and aware --

Certainly.

-- of the yield versus what you are earning on your cash?

Absolutely.

(CALLER INSTRUCTIONS). David Whitsky (ph) from Morgan Stanley.

Paul, on the in-licensing front, how many Phase II prospects are on your radar screen where you have active discussions, and in what therapeutic areas?

We are very close to completing one in-licensing activity, but it isn't done, and until it is done, I am really not in a position to talk about it. It's a very interesting opportunity, and I also don't particularly want to get into the therapeutic area.

Is it correct to say a Phase II candidate?

Yes, it is. That particular licensing opportunity is a very interesting Phase II entity. Other things that we have looked at -- again, without getting into a lot of detail -- are areas where Bob and I have looked for types of in-licensing opportunities that have decreased risk, but may only be in Phase I or ready to go into Phase I -- but they are the types of entities that have a lot of financial potential, and have different attributes to each of these unique things that I can't tell you in detail about that increase the probability of technical success markedly. And Bob, do you want to add anything to that?

I think that that's about as much as we should say. We are actively looking at some interesting opportunities, and we should have more to say as we go forward in the year.

John, if I'm correct, I show a 2.9 million share increase this quarter. What is behind this increase and what should our share guidance for 2003 be?

The majority of that increase relates to the purchase of Maxia.

And for the year? Is it about 71.4, or what should we be looking at for guidance?

For the shares outstanding -- the shares will increase as the year goes on, as we do have employee stock purchase plans and exercise of options, but it will increase in a rather normalized fashion. And we are not forecasting significant increases or other issues at this point.

Of the 27-37 million of second half revenues required to meet the guidance of 50-60, in aggregate, how much is contractually committed versus assumptions of new business?

I don't have that number for you. As I said, what we are forecasting to get to that number is a stable LifeSeq customer base, a growing BKL customer base -- kind of on the same trajectory as it has been on -- and some licensing deals that we have got in the pipeline.

Sharon Salo (ph) from (indiscernible) and Company.

Could you comment on your relationship with Lexicon Genetics, and let us know if any of your protein therapeutics might be forthcoming from that relationship?

We have a good ongoing collaboration with them. We are in the process now of evaluating the biological effects of either knocking out or knocking in a large number of secreted proteins to which Incyte has intellectual property rights. It's too early to say whether we will see something emerge from that which will be a suitable development candidate, but we are making excellent progress and view them as a very productive partner.

Daniel Vera (ph) from (indiscernible) Capital.

Just to clarify the response to an earlier question about your cash position -- (indiscernible) I thought I heard you say that you expect to have a little bit above 300 million in cash at year end 2003. Does that mean you expect to burn through about twice as much per quarter over the next two quarters than you just did? About 30 million each quarter?

What we are saying is we look to end the year above 300 million. Exactly how much above is still to be determined, but we do see that our cash burn for the next two quarters will be greater than the 15.6 million that we did realize in the second quarter.

Can you give me just a ballpark of what you expect that cash burn to be in 2004?

We will be discussing 2004 in the quarters ahead, but we are not yet prepared to discuss that at this point in time.

Just as an order of magnitude, it will be closer to what you burn per quarter in the third and fourth quarter, or closer to what you burned in the second quarter?

We will address that question when we are ready to deal with the overall guidance for 2004, because you can't talk about one piece without the whole.

Brian Putnam from AG Edwards. Mr. Putnam has withdrawn his question. There are no further questions at this time. Do you have any closing remarks?

Yes, to just thank everybody for joining us today. We have made good progress in the last few months and expect the rest of the year will be equally productive. I look forward to updating you in the months ahead. Thank you again, and we will end the call now.

At this time, I would like to thank everyone for joining today's Incyte second-quarter 2003 financial results conference call. You may now all disconnect.

(CONFERENCE CALL CONCLUDED)