英賽德 (INCY) 2003 Q3 法說會逐字稿

Welcome to the Incyte Corporation third quarter results conference call. At this time, all participants have been placed in a listen-only mode and the floor will be open for questions following the presentation. (Operator Instructions). It is now my pleasure to turn the floor over to your host, Pam Murphy, VP of Communications and Investor Relations.

Thank you, good afternoon and welcome to Incyte's third quarter conference call. With me today are Paul Friedman, Incyte's Chief Executive Officer, Dave Hastings, Incyte's new Executive Vice President and Chief Financial Officer and Lee Bendegkey, Executive Vice President, General Counsel and General Manager of Incyte's Information Products Division.

Today's call will include an overview of the quarter from Paul, a discussion of new additions to senior management, a review of recent accomplishments in drug discovery and development and a brief update on Incyte's information products. Dave will follow with a recap of the third quarter financial results and a description of our near-term objectives (indiscernible) making sure Incyte operates in a fiscally sound and responsible manner and that the Company has the financial resources, procedures and focus to support these operations and its objectives.

Before we begin, we would like to remind you that the prepared statements that management will be making during this conference call and the 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 the potential value of our recently in-licensed compound Reverset; plans and timelines for advancing our drug discovery programs and for advancing compounds both internally developed and in-licensed into the clinic; anticipated market opportunities; strategic planning for information products; key strategic finance goals and near-in financial guidance as to revenues, net loss and cash position. We encourage you to see Incyte's quarterly report on form 10-Q for the quarter ended June 30, 2003, the press release issued for Incyte earlier today and Incyte's other filings with the SEC for a summary of risks and factors that may impact our future results.

Pam, thanks and thanks to all of you joining us today. Since our last conference call, we have continued to make excellent progress. We have strengthened the senior management team, we have in-licensed the Phase II compound for HIV and we have selected a lead CCR2 receptor antagonist to move forward into preclinical toxicology.

With respect to the senior management team, there have been three key changes. All three of the new team members bring important skills, relevant experience and proven track record that support our objective of becoming a successful drug discovery company.

Our most recent hire -- Dave Hastings, Executive Vice President and Chief Financial Officer -- joined us from Acrule (ph) where he was instrumental in transforming it from a chemistry service company into drug discovery. Dave's strong financial and strategic leadership will ensure that Incyte operates in an efficient and effective and a fiscally responsible manner.

John Keller, Executive Vice President and Chief Business Officer, joined us from GlaxoSmithKline. He had been with GSK and its predecessor, SmithKline Beecham, since 1987. John's most recent position was Vice President of Business Development in GSK's worldwide business development group where he was involved in the establishment of numerous product licensing agreements with companies based in the U.S., Europe and in Japan. He worked with a wide range of partners, including major global pharmaceutical businesses, mid-sized regional health care companies and emerging and late-stage biotechnology firms and he was instrumental at concluding various innovative deal structures, such as joint ventures and consortia. In the short time he has been with Incyte, John has already brought a great deal of clarity to the Company's business development process. And while it is still early to cite specifics, I look forward to describing the results of his efforts in subsequent conference calls.

Rich Levy, our senior vice president of drug development, joins us from Selgene (ph). Rich worked with me at DuPont Pharmaceuticals and played an important role in the development, registration and commercialization of Sisteva (ph), a non-nucleoside HIV reverse (indiscernible) inhibitor whose 2003 sales will be well in excess of $600 million. Through our work with Sisteva, we became interested in developing other new therapies that could address the drug resistance problem that the majority of HIV patients experience after exposure to first-generation drugs.

One of the compounds that caught our attention was Reverset, the compound that we recently in license from Pharmasset. Reverset is a novel NRPI, that is nucleocide reverse transcript based inhibitor, and Rich and I, along with the DuPont's business development team, were responsible for in-licensing the compound to DuPont from Pharmasset in 1999. At that time, Reverset was in preclinical development. Bristol-Myers purchased DuPont Pharmaceuticals in 2001 and they felt that their preclinical and clinical pipelines for HIV compounds were fairly full. And as a result, they elected to return the compound to Pharmasset. Pharmasset proceeded with its development, conducting a series of early clinical trials which we reviewed earlier this year. The Phase I and the early Phase II data were compelling, very much what we expected. And as we were interested in accelerating the development of Incyte's pipeline, we decided to see if we cold renew our alliance with Pharmasset.

We completed the collaboration agreement this summer, and I believe the alliance is very good for both Pharmasset and us. Both companies have expertise in the area of HIV and both companies are keenly interested in expediting Reverset's development, registration and commercialization. Importantly, Reverset has the potential to be effective in patients who harbor HIV that are resistant to current NRPIs. In in vitro testing, Reverset has been shown to be effective against the majority of the most prevalent NRPI-resistant strains of HIV.

In addition to its strong efficacy profile, current preclinical and clinical results suggest that Reverset has the potential to be well tolerated and that it can be dosed once a day. There is a food effect with Reverset; that is, food in the stomach decreases the amount of Reverset that gets absorbed. As a result, we will need to establish the optimal time for dosing and we will also investigate whether different formulations might overcome this effect.

In summary, based on our review of the data and the HIV market, we believe there is a strong likelihood that Reverset will not only be effective as a treatment for patients with resistum (ph) virus, but also for anti-retroviral viral regimens in treatment-naive patients. Once the ongoing Phase II dose escalation trial in treatment-naive patients is completed, a second Phase II trial in treatment-experienced patients is planned for the first half of next year. We currently expect to take Reverset through Phase III ourselves, and while we could certainly also market it, we may choose to co-promote it with another company. Our decision is likely depend on the data and how large a market opportunity we see for the drug.

Now I would like to update you on our most advanced internal drug discovery program, focused on a small molecule antagonists of the chemo kind receptor known as CCR2. We have moved the lead compound -- INCB-003284 -- into IND-enabling preclinical toxicology studies with the goal of having a compound enter human testing in the first half of next year. While there is a substantial amount of animal data supporting the role of CCR2 in inflammation, until recently, there has been no experience with this target in humans. So we were pleased to learn based on encouraging Phase I data that Millennium has initiated a Phase II study with its humanized monoclonal antibody that blocks in the CCR2 chemo kind pathway. Millennium used a classic delayed-type hypersensitivity skin test -- that's a DTH skin test -- in their Phase I study as a way to assess the potential anti-inflammatory effects of the antibody. We used a similar skin test in primates earlier this year, which I have described for the same reason. Interestingly, while we have not seen the actual date, it appears that Millennium saw the kinds of effects with their injectable antibody in humans that we have observed with oral dosing of our small-molecule drug in primates; that is, the prevention of an inflammatory reaction in response to antigen challenge. This initial proof of pharmacological principal in primates and now in humans is really quite encouraging.

Additionally, in a mouse DTH model, which I also described earlier, the efficacy that we have seen with our oral molecules is equivalent to what is achieved in that model with anti-TNF biologics, such as Envil (ph). We continue to believe that 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 neuropathic pain, perhaps even artherosclerosis (ph). Given the success of the injectable TNF inhibitors despite some of their shortcomings, we believe an oral agent that could provide comparable efficacy would improve tolerability, ease-of-use and at less cost would represent a significant therapeutic and commercial success.

We have also made progress in two of our other discovery programs, which include our oral protease inhibitor program for treating solid tumors in particular breast cancer and our oral phosphotease (ph) inhibitor programs for cancer and diabetes, and I look forward to discussing these programs in greater detail at a later date.

Shifting gears with regard to the information products, we continue to assess the best strategic direction for this part of the Company, given that our core focus and our greatest potential to deliver shareholder value is through drug discovery and development. We intend to make a determination before the end of 2003 regarding the future direction of our information products business. And now I would like to turn the call over to Dave.

Thanks, Paul, good afternoon everybody. I have been at Incyte all of three weeks and I'm very pleased to be here. It has been extremely busy, as you may imagine, and as you would suspect, I've been working intensively with our finance group to prepare for the third quarter release and this conference call.

To begin, I would like to share a few of my near-term strategic goals with you. I think it's fair to say that my first priority as Incyte's new Chief Financial Officer is to establish and articulate a clear financial strategy for the Company. Also, I believe it is important to share with you the metrics we will use to assess our performance, as well as define the metrics we believe are important for investors to understand and have access to. And I agree that our communications with investors and our financial guidance need to be characterized by transparency, consistency and candor.

From my perspective, Incyte under the leadership of Paul has done a remarkable job of assembling a top tier drug discovery team. I also believe that the Company has worked diligently to restructure its genomic information products line and lower the overall cost of operating this side of the business. I agree with Paul that drug discovery and development and ultimately medicines in man represent the best way to build long-term shareholder value and I will focus the majority of my efforts on structuring the company so that it is using its resources with the greatest efficiency and effectiveness towards this goal. I look forward to working with John Keller and the rest of the executive team over the next several weeks as we finalize our recommendations for the information products businesses and establish our financial and operating goals for 2004.

Another key objective for me is to make sure Incyte is using its cash as effectively as possible. Incyte is fortunate to have a strong cash position and the preservation effective use of cash will be one of the most important financial metrics that we will use to measure our internal performance. So in terms of timing, I expect to provide you with clear and specific financial guidance for 2004 at our fourth quarter and year-end financial report and conference call.

So with that, I would now like to review our third quarter results. As you saw in today's press release, revenues for the second quarter were 13.2 million as compared to 22.4 million for the same period in 2002. It is important to note that the 13.2 included $4.4 million in revenue that is a onetime fee from one customer. Revenues for the first nine months of 2003 totaled 36.8 million, as compared to 80.5 million for the same period in 2002. Our updated revenue guidance for 2003 now reflects only committed revenues for the fourth quarter and, therefore, based on that, we believe our revenue for the full-year will be no less than $45 million. Net loss in the third quarter was $43 million, or 60 cents per share. It is important to note that includes a $6.3 million charge recorded as in-process research and development related to our in-licensing of Reverset. In addition, we reported a charge of the 13.4 million related to write-downs of certain strategic investments that Incyte holds in other companies that have experienced significant reductions in their market value. This amount was recorded in interest income, other income and interest expense.

Also during the third quarter, we reported a gain of 1.5 million on the repurchase of convertible debt and long-term investments. In the nine months ended September 30, 2003, the net loss was 125.7 million for $1.77 per share. Included in the net loss are costs related to in-process research and development of 34.4 million, a charge of 16.1 million related to write-downs of certain strategic investments that Incyte holds in other companies and 1.4 million of costs associated with past restructuring programs. We recorded a gain of $2 million on the repurchase of convertible debt and long-term investments. For the full year, including our in-process research and development charge of 34.4 million and strategic investment write-downs of 16.1 million, we now expect our net loss to range between 155 and $160 million. This guidance does not include any additional strategic initiatives, such as restructuring charges or additional impairment-related items.

In terms of our cash position, at the end of the third quarter, the Company had cash and short-term investments of $315.1 million. Cash consumption for the third quarter included 3.1 million for the repurchase of a portion of the Company's subordinated convertible notes and the up-front payment of 6.3 million to Pharmasset for the in-licensing of Reverset. We now expect to end the year with cash and short-term investments in the range of 290-295 million. Our previous guidance with ending cash ranging from 305 to 320 million did not include the amount (indiscernible) to repurchase convertible subordinated notes or the amount paid to in-license Reverset.

I would like to conclude my remarks by saying how pleased I am to serve as Incyte's new CFO. I'm confident Incyte represents a compelling opportunity for shareholders, our employees and ultimately, the patients we expect to treat with our compounds. I look forward to contributing to Incyte's continued progress, and with that, I will turn the call back to Paul.

Thanks. That includes our prepared remarks, and we will now open the call up for questions.

(Operator Instructions). David Witzke (ph), SunTrust.

Thank you for taking my question. I guess Paul or Dave, if we could get a headcount update and the split between drug discovery, the information business and I guess general administrative?

Sure. The Company's headcount is I think about 420 now, and we have not given clear guidance as to the split of those and we look forward to doing that at our fourth quarter call.

I guess posed a different way if you can provide the split I guess in R&D and SG&A between the drug discovery side and information business side?

The drug discovery headcount in Wilmington is approximately 150.

Okay. And regarding the strategic decision I guess you'll announce by year end regarding the database business, if you chose to disaggregate this, how married is the online business or the database business to the royalty licenses, and is this something you can unbundle?

It is not coupled, and it can be unbound with no problem.

Is this something that is important for you to keep in your view at this point the royalty licenses?

We are looking at all possible alternatives. We have been studying this hard, some people would say maybe a little bit too long. But we are near the end of our deliberations. And at this point, I would not want to rule anything in or out, but we regard those annuities, as I would call them from the original subscribers, as something that is of great value to us. And unless a buyer provided a fair value for them, we would anticipate keeping them.

And the question if I may, what is the highest dose you will test in the 10-day studies, and do you have a feel now I guess from in vitro data, what dose you need to get two to cover the key varied (ph) resistance? I guess mutation is the K 65 TR (ph) I believe?

Yes. K65R is -- of the mutations that you see in cell culture, that is the one that is the biggest hurdle for us. It is very difficult to make a straight one-to-one correlation with the IC-90 -- the inhibitory concentration that you need to shut down viral replication in cell culture with the amounts of drug you need in plasma, because you never use the drug; you always are using it with other drugs. You follow what I'm saying? And in cell culture, it is not terribly easy to do those kinds of experiments where you're combining with other drugs and looking for selection of mutants. So that is the mutant that would be the highest hurdle for us. It currently is not a very abundant mutant, but I am sure you follow the Viriad (ph) experience. And with time, they do select for K65R, and we also can select for it under proper conditions in cell culture. So if you just looked at a straight cell culture number that you would need to be above, you need something that is something around 6-6.5 micromolar (ph). But my belief is you don't need that absolute concentration, that trough in combination with other drugs to suppress the emergence of that virus.

Having said that, if we shot for -- if our aim was to end up with trough levels that high, based on the single-dose Phase I experiment that we had seen and I presented actually a single dose of 200 milligrams -- not trough, but maximal concentration level, which is more relevant here. It is not trough, it's maximal concentration. Would give a maximal concentration sufficient to suppress K65R. Having said that, we may in the 10-day study go to doses as high as 300 milligrams if we find that the 200 milligram dose is well tolerated.

If you can remind us in the 30 patients in the 100-day study -- is that the correct number, and are they all wild type (ph) HIV-1 patients?

They are all treatment-naive patience. They were not genotyped before they were given ten days of therapy. The number 30 is likely a low number because we've studied three different dose levels, and I think in each dose level, there are 8 patients who received drug and there are three placebos. So there are 11 in each cohort. And if we'd to go to 300 milligrams, then we will add another 11 patients to the overall study.

Thank you.

Meirav Chovav, UBS Warburg.

Hi, this is Derik De Bruin. Thank you for taking my question. In addition to I guess you said there was some food effects with the drug. And could you remind us what the safety profile was on Reverset, and how it compares relative to (indiscernible)?

It actually in the Phase I single-dose study, there were no adverse reactions that were anymore frequent than you saw in the placebo group. In animal studies, the rate-limiting toxicity was as you would expect as it is with pretty much any nucleocide, you get bone marrow suppression at some dose. And we would go in this initial Phase II study.

So looking where you're at now, what do you think it would cost you to take this all the way through to Phase III?

All the way through Phase III?

Yes.

It really depends on what we ultimately decide to do for our pivotal trial, so I cannot answer that question. But if you go to what I think it is probably public information somewhere and look at what it costs to take an HIV compound through Phase III, reasonable number of patients, the number of patients you would expect to have treated by the time you file somewhere in the 800-900 thousand range, (indiscernible) average cost per patient, you could probably do the math - it is significantly less expensive than trying to register a drug to treat rheumatoid arthritis, for example.

Right, of course. Could you just provide a little color on the write downs you took during the quarter and what else we could possibly see going forward on this?

The write-downs, as is related to our (indiscernible), as you know, every company each quarter has to review the market valuation of companies they have invested in for strategic reasons. We certainly did that at 9/30 (ph), and that is what that write-down relates to. And as each quarter moves on and as market conditions change, we will continue to review our investments on a going forward basis.

Okay, thank you very much.

(Operator Instructions). Michael Malarkey, (indiscernible).

Could you give us your guess at what the value of the information business is if the royalty revenues are separated out? Should we think in terms of $100 million? Is that too high, is that too low?

I think we're not in a position to give you that information.

Thank you. I guess the other question is -- in terms of the number of investments that you have, I guess she went back and wrote down the investments where companies haven't performed. Should we -- can you just give us a rough guidance as to how many different investments you have?

The Company has a handful, so it is not a significant amount. But certainly, there were investments the Company made in the past where there was strategic relationships.

Okay, thank you very much.

(Operator Instructions). David Witzke.

Thank you for taking my question again. Question regarding the CCR2 antagonist. Have you begun the GOP one-month tox studies yet? And if so, what is your confidence level at this point of being in the clinic in Q2 or I guess filing the IND by Q2?

We are scheduled to begin that study the 11th of November. In two species, we're going to be during the study in (indiscernible) monkeys and rodent. The reason we chose (indiscernible) monkey as opposed to canine is we wanted to have -- the CCR2 receptors are fairly species-specific, so our lead compounds don't have much pharmacologic activity on the rodent receptor and they have some on the dog, but they are much more like human in their sensitivity in primates. So we're going to do one month (indiscernible) one month rodent.

We have done obviously some pre-GLP work in those species that give us some comfort. I've spent a lot of time in the toxicology world, so I'm not going to put a probability on whether or not we make it through the one-month study. But the studies we have done in-house, including histopac (ph) studies after significant exposure in these two species, have given us benign results. And therefore, we have as much confidence that you could have at this point in time that we will make it through the one-month study. Because a lot of the really nasty things that you see in the one-month study is you see within 7-10 days. There are always these straggling things that one can never predict. So I am cautiously optimistic we will be in man with INCB-003284, a.k.a. 3284, sometime next year, or the first half of next year.

I'm going to amend my total headcount number. It's actually 450, not 420, just be clear.

Okay, thanks. Would the Phase I most likely start with a (indiscernible) healthy volunteers before moving into RA or another --

It's interesting. We're looking into that and it is interesting you ask that question, because there are some very interesting studies that were reported at the ACR meeting within the last few weeks that suggest that, with a very short exposure time, one can see salutory effects in active joints in rheumatoids; in particular, the MIP joint, which is the joint between your finger and the solid part of your hand. You do a little, relatively benign biopsies that show very interesting and rapid amelioration of disease with effective therapies.

So we are currently debating whether or not that sort of study in Phase I would give more information that is straight -- we do the do the single dose and then we give them the straight-up multiple dose study where all you're looking for is PK and a bit of tolerance. We may be able to do that in that population. Alternatively, we can recapitulate the study that we did in primates and that Millennium has done with their injectable in humans in a 10-day study where we could look for suppression of delayed type hypersensitivity to reaction in people who are tuberculin positive or who are positive to candada (ph) antigen. So those are the two kinds of studies we're looking at, and we haven't decided yet whether we do one of them or whether we do both of them, both types studies as a multiple dose Phase I study where I really think if you'd did fit it in the rheumatoids and the technology was something after we look into it, it was as reproducible as it appeared to be at the presentation, that we would by the end of a multiple dose Phase I study, have a lot of useful information about efficacy.

Interesting. I guess Millennium has antibody, but they have also had a long-running small molecule program on CCR2 and of yet to be successful there, although it is still an active program, is my understanding. Who else has made progress on the small molecule side? Is Merck in Phase I, and kind of who else do you see out there?

Well, there are a lot of companies still doing it. I don't know where Merck is. There are rumors out there that they have a compound in Phase I, but I cannot confirm that. They would have to tell you that, and I have no firm data that says they are or they are not.

Okay, thank you.

Bob Ai (ph), Maryland Biomed.

Hi, thank you for taking my call. You mentioned that Reverset interact with foods. Can you elaborate a little bit and kind of (indiscernible) overcome by taking the pill within an hour before the meal or after, or is it more complicated?

Well, that is what you would do. We're going to do a study in parallel to the Phase II studies that I talked about in my prepared remarks where we look at dosing the drug at various intervals before breakfast, two hours after a meal. So two hours before, one hour before, 30 minutes before, or two hours after a meal, which would be compatible with taking it when you go to bed. So those are times when drugs should -- one or more of those times will be time when the drug will be absorbed quite well and adequately. But the reason we are doing this study is the reason we will probably look into a couple of other formulations is the fact that HIV patients end up taking so many pills. And the best situation would be if you could take them all at the same time and be done with it, and that would be our goal is to make it as efficient for the patient as possible. But there should be no problem finding a portion during the day when we will get perfectly fine absorption with the drug.

Okay, thanks.

James King, I-Trust (ph).

Thank you for taking my call, and I'm sorry if I repeated anything. I got on the call a little late. But have you disclosed or given an indication on how you are going to shed the information business, and what kind of valuation you have signed to it? And can you talk a little bit about your cash burn? I believe you have a little over 300 million of cash on the balance sheet as of right now? Thank you.

Sure. We have not given guidance as to the value of the information business. As Paul mentioned, we're looking at all strategic options right now for that business. The second part of the question, in terms of cash burn, again, we have not given guidance for '04 yet. We'll do that in the next call for the fourth quarter. And was there any other questions?

No, that was primarily it, just the cash burn for next year, but it sounds like you're not going to given any insight on that.

Yes, we will definitely do that at the fourth quarter call.

Okay, thank you.

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

Again I want to thank everyone for joining us today. I think that you have heard that our last few months have been productive and I believe demonstrate very good progress. It's obvious we still have a lot of work ahead of us with our recent additions to senior management, the in-licensing of Reverset and oral CCR2 receptor antagonists on track for human testing next year, first half of next year and several additional high-quality drug discovery program underway, which several at least one of which -- and I hope two of which I will be discussing in more detail when we do our fourth quarter earnings call. I remain confident in our ability to build significant long-term shareholder value. Thank you again.

Ladies and gentlemen, we thank you for your participation in today's audio teleconference.