英賽德 (INCY) 2003 Q4 法說會逐字稿

Good afternoon, ladies and gentlemen, and welcome to the Incyte Corporation 2003 financial results conference call. At this time, all participants have been placed on a listen-only mode and the floor will be open for your questions following the presentation. It is now my pleasure to introduce our host, Ms. Pam Murphy. Ma'am, the floor is yours.

Thank you and good afternoon and thank you for joining us. With me today are Paul Friedman, Incyte's Chief Executive Officer; Dave Hastings, Incyte's Executive Vice President and Chief Financial Officer; and John Keller, Executive Vice President and Chief Business Officer. As you saw in today's press release, Incyte has made the decision to close its Palo Alto facilities to complete its transition to a drug discovery development company. In today's call, Paul will review the strategic basis for this decision and its implications for Incyte. John Keller will further describe the status of the information business, the analysis that led to the decision and the steps to be taken following this restructuring. Dave Hastings will discuss the financial impact of closing the Palo Alto facilities, briefly discuss 2003 fourth quarter and year-to-date results, and provide you with insight into 2004 financial guidance.

Before we begin, we would like to remind you that the prepared statements that management will be making during the conference call and statements made in response to questions will contain predictions as to 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 anticipated plans and timelines for making investments in our drug discovery programs and for advancing compounds, but internally developed and end-licensed into the clinic and into further stages of development; the potential shareholder value associated with our drug discovery and development activities; the anticipated cash impact of an expected elimination of operating expenses from our announced restructuring efforts; plans to explore strategic options for the information products; the financial impact of today's restructuring; our expected employee headcount; and 2004 financial guidance as to cash utilization, revenue, operating expenses, SG&A expense, and interest income, interest expenses and other expense. We encourage you to review our latest 10-Q, filed September 30, 2003, our press release issued today, and Incyte's other filings with the SEC for a summary of risks and other factors that may impact our future results. Paul.

Thanks, Pam, and thank you all for joining us today. As I have said before and I have stated again in our press release, we firmly believe that our greatest potential to deliver sustainable shareholder value is by concentrating virtually all of our efforts on our drug discovery and development programs. So, for some months now, we have been diligently evaluating our information products business in order to determine how, and indeed if, we should proceed in this difficult marketplace.

Our decision to close the Palo Alto facilities reflects dramatic changes that have taken place and the challenges that have arisen in the genomics informations (ph) product market created by the emphasis for research tools and outside services in both pharma and biotech R&D budgets, as well as by the increasing availability of genomic data and analytical tools in the public domain. Despite our best efforts, revenues from LifeSeq and ZooSeq to (ph) product lines generated by the team in Palo Alto have been declining steadily, and we can no longer justify the infrastructure and costs of maintaining our California operations.

The decision to close Palo Alto does not in any way affect Incyte's extensive intellectual property portfolio, other than to transfer management of the portfolio from Palo Alto to Delaware. Furthermore, this decision does not alter the potential milestone and royalty obligations from past and present LifeSeq subscribers. We are also retaining our Proteome subsidiary based in Beverly, Massachusetts. This subsidiary produces the BioKnowledge Library productline, which has maintained consistent sales, operates on a low expense base, and requires a minimum amount of senior management attention.

When I joined Incyte in December of 2001, I believed that the Company's extensive experience and knowledge in the information products area was an important asset. While I continue to believe that new product lines could be developed with the potential to create a sustainable information business going forward, after careful consideration and analysis, we have concluded that the scale and risk associated with that investment are too high to justify, particularly in light of the success of our drug discovery and development efforts. I believe Incyte's resources, both intellectual and financial, are of far greater benefit to shareholders if invested in our ongoing discovery and development programs. And in that vein, the next several years promise to be extremely productive for us.

Near-term, we look forward to presenting later this month the results of our first Phase II study on our nucleoside analog Reverset in treatment-naive HIV patients, and to initiating human testing of our lead CCR2 receptor antagonists. I also look forward to updating you on our lead cancer protease inhibitor, which will soon be in IND-enabling preclinical testing -- safety testing, and to provide you with more detail on some of our earlier stage programs. Now I would like to introduce John Keller, who joined us in September as our Chief Business Officer. Recently, John assumed oversight of our information product activities, and we thought it would be appropriate for him to review the analysis that led to yesterday's announcement.

Thank you and good afternoon. I joined Incyte a few months ago, coming from GlaxoSmithKline and formerly SmithKline Beecham, where in addition to broader efforts in business development and alliances, I had extensive involvement in SmithKline's genomics and bioinformatics efforts, starting in 1993. I was also integrally involved in the formation of diaDexus, GSK's joint venture with Incyte, which occurred in 1997. As a result, I have had the chance to observe the evolution of the genomics field as a whole and the genomics information product field in particular.

As Paul stated earlier, the genomics information product marketplace has come under considerable pressure from multiple directions. Proprietary genomic data, the original value proposition upon which the LifeSeq and ZooSeq product lines were built, has been substantially devalued by the release of vast amounts of genomic data into the public domain. As a result, providing a product with demonstrable differential value is increasingly difficult and requires substantial high-risk investment. Furthermore, this competition with the public domain is occurring against a backdrop of mounting restraint on pharmaceutical and biotechnology R&D spending. There is a clear evidence of the challenges of this market in the number of informatics companies that have been dissolved or been acquired at fire sale prices in the last three years. And many of those who remain in the market are struggling to achieve profitability, despite repeated restructuring. Some are shifting their focus into other areas, including drug discovery.

With that said, the burgeoning amounts of information released into the public domain does create a market opportunity, as it is not possible for scientists to keep up with the vast amount of scientific literature, even within a relatively focused area. A product which offers this information in an easily accessible and searchable system is of considerable value, and this is the market need that our BioKnowledge Library productline is specifically designed to fill. This productline was cash-flow positive in 2003 because the investment required to create the underlying systems and technology was completed several years ago. As a result, this product can now be maintained and updated on a low expense base.

Last year, we outlined a new biocuration product direction for the Palo Alto information business. This product concept was, in large part, inspired by BioKnowledge Library, but was considerably more aggressive in scope, encompassing the capture, curation and adaptation of numerous forms of scientific data, including sequence expression, protein-protein interactions and more. I do believe there is a need in the market for this type of product, but it would have required a large, high-risk investment to realize this vision, and given the data available to us at this time, there are no guarantees that the market would be sufficiently receptive to justify this investment.

This is a decision that is clearly reflective of our current focus on drug discovery and development, and we have made the decision to devote all of our out-risk investment to that effort. As a result, at this time, we are retaining only those information product-related activities that have the immediate potential to make a positive cash contribution to Incyte -- specifically, BioKnowledge Library, as discussed above; our gene-related intellectual property portfolio, the management of which will be transferred to Wilmington under the leadership of our General Counsel, Pat Schreck, who has extensive patent experience; and the potential milestone and royalty obligations of current and past LifeSeq subscribers. In terms of current subscribers to ZooSeq and to LifeSeq, we will be working closely with them very shortly to assure that they are comfortable with our decision.

I would like to concluded by saying that we have and will continue to explore options for the sale of our information product lines. However, given the realities of the genomics information product marketplace and the difficulty of predicting the probability of success, timing, or economics of these efforts, we have not assumed any proceeds from such sales in our 2004 cash projections. Now I would like to turn the call over to Dave Hastings.

Thank you, John, and good afternoon everybody. As both Paul and John have made clear, today's decision is an important step towards Incyte's ultimate strategy of becoming a leading drug discovery and development company. As part of this transition, it is important that the financial impact of this decision, as well as our go-forward 2004 guidance, be as transparent and clear as possible. We believe that the actions we took today are clearly positive for Incyte from a financial perspective. By reducing our workforce by 257 employees and eliminated approximately $50 million in annual operating expenses, we can now focus the Company's resources on drug discovery and development. With that, I thought it would be useful to walk you briefly through our results for 2003, then outline the restructuring charges resulting from our decision, and conclude with our guidance for 2004.

As you saw in today's press release, revenues for the fourth quarter were 10.3 million as compared to 21.1 million for the same period in 2002. Revenues for the year ended 2003 totaled 47.1 million as compared to 101.6 million for the same period in 2002. Our revenues slightly exceeded our guidance given in our third-quarter press release of at least $45 million.

Net loss for the fourth quarter of 2003 was 40.8 million, or 56 cents per share, which includes restructuring and related charges of 14.5 million, of which 11.5 million was recorded in connection with the Company's decision to reduce certain headcount and write down certain assets related to our genomic information product line. For the year, Incyte's net loss is 166.5 million, or $2.33 per share. Our net loss for the year includes a total of $34 million of in-process research and development charges, $18 million of write-downs of strategic investments, and 15.9 million of restructuring and related charges. In terms of our cash position, at the end of the year, the Company had cash and short-term investments of approximately $294 million. This ending cash is within the range of our ending cash guidance given in our third-quarter press release.

I would now like to addressed the financial impact of our actions announced today. As a result of closing down our Palo Alto research facilities and headquarters effective April 2nd and our restructuring decision made in the fourth quarter of 2003, Incyte will reduce its headcount by approximate 257 people, or 57 percent of its workforce. This will result in restructuring and related charges of approximately 11.5 million to be recorded in the fourth quarter of 2003, and up to $47 million to be recorded in 2004. The components of the total restructuring and related charges include charges related to the closure of the Company's Palo Alto facilities, costs for prior tenant improvements and equipment purchases, expenses related to our reductions in workforce and in other items, primarily consisting of capitalized software. The cash impact in 2004 of these restructuring-related charges is expected to be up to $23 million. As we said in the press release, after the restructuring, we expect to have approximately 180 employees based in Wilmington, Delaware, and approximately 35 employees based in Beverly, Massachusetts.

Now, in terms of our 2004 financial guidance, from a cash perspective, the Company expects to use up to $80 million in cash for its Wilmington-based drug discovery, development and administrative support functions in 2004. In addition, the Company expects to use up to 23 million in cash for restructuring related activities and up to $15 million of cash related primarily to the first-quarter operations of the information product line and transitional expenses related to ceasing its California operations. Also in 2004, the Company expects to use up to 16 million in cash for net interest expense, other items, and working capital changes, primarily related to the information product line. Therefore, the Company expects to use between 130 and 140 million in cash in 2004. This guidance does not include any cash utilized for any possible end license or purchase of products in clinical development.

We expect 2004 revenue to range from 7 to $9 million. Our guidance only includes revenues that are contractually committed. From the operating expense perspective, we expect total research and development expense of between 91 and $95 million in 2004. Of the total research and development expense, the Company expects its Wilmington-based drug discovery and development expenses to total approximate $73 million. Included in the $73 million is approximately $9 million of non-cash charges, primarily related to the amortization of a prepaid discovery collaboration (ph). Also included in the overall research and development expense of 91 to 95 million is up to $12 million of cost associated with the information products, which primarily includes the first quarter's activities and up to $10 million in cost related to our intellectual property and the BKL product line.

We expect selling, general and administrative expense to range from 21 to $23 million in 2004. Included in this guidance is 5 to $6 million relating to the information product line and transitional expenses as the Company ceases operations in Palo Alto. We expect interest income to range from 3 to 3.5 million in 2004, while interest expense is expected to range from 9 to 9.5 million. Our other expense is expected to range from 2 to $500,000. Our guidance does not include any potential adjustments to our strategic investments in other companies, which may occur during the year.

With that, I would like to conclude my remarks by saying that I'm confident that the actions we have taken today positions Incyte well for completing its transition to a successful drug discovery and development company. I will now turn the call back to Paul.

Thanks Dave. We have covered a great deal of ground in the past 20 minutes and we appreciate your interest and attention. Before opening to questions, I want to once again say that I have great confidence in our drug discovery and development programs. I believe this year will confirm that statement and our ability to create substantial value as we expect Reverset to advance through Phase II, our CCR2 receptor antagonist to begin human testing, and the potential therapeutic and commercial value of our lead protease inhibitor for cancer, about which we said very little up until now, becomes more obvious. I think now would be a good time to open the call for questions.

The floor is now open for questions. (OPERATOR INSTRUCTIONS) David Witzke of SunTrust.

Thank you for taking my call. First question for David. Are you able to break out the sales R&D and SG&A contributions from the discontinued businesses in '03 so we can get a better understanding of the run rate of the business going forward?

Well, as you know, we haven't given that guidance in the past, David. I think the guidance we have given in '04 should give you a good sense for what we expect from those businesses this year.

Okay, but if we look just on the -- so last year, cash usage was 135 million. It looks like it will be about the same in '04, but that includes about 38 million at least in onetime charges.

That's right.

So looking at cash burn forward, it's actually more like 97 -- is that correct?

Yes, that's right. I think the key here is to look at what the Wilmington based burn rate will be next year in '04. I think that will give you a good indication, particularly in R&D, where cash perspective, we are in basically the mid 60s going into '04 in terms of cash burn.

Okay. That is helpful. As far as increasing R&D forward, should we look mainly on the clinical side or do you still have buildout in the biology or chemistry areas?

I'll try that. We do not plan at this time to expand our discovery operations beyond the 150 to 155 people we currently have on board. So, that is pretty much a fixed set of expenses. And the expenses beyond that will reflect the success of our clinical programs going forward.

And then a final on the restructuring charge, are you out of the Palo Alto leases after that charge?

From a book perspective, David, yes. We will record our best estimate in terms of financial impact of that in 2004.

And then if I had time for a question on Reverset. How do you plan to update investors on the 10-day Phase II data in (indiscernible) naive patients at Retrovirus, and can you give us your thoughts on the next steps for this program going forward?

We plan a conference call with the lead investigator, Rob Murphy, who will be presenting, I think that day -- right -- at the end of the conference. We then plan to move ahead sometime in the middle of the year -- towards the middle of the year -- with a Phase IIB study in treatment-experienced HIV patients. And we are still on track for beginning our pivotal trials, Phase III trials, in 2005.

So you will have a presentation with an investigator?

That's correct.

So that's a good sign. Look, guys, tough decisions, but right thing to do both strategically and financially, and congrats on moving forward.

Craig West of AG Edwards.

Hi everybody. I had a couple of questions. I wondered -- we talked a bit, Paul, about the sort of number of slots you have available to discover and develop, and the number in the past was given as seven. I just wondered if you still think of yourselves as a capacity of about 7 slots?

I think that was the high end. I think when we talked it was in the five to seven range, but we thought -- it really depends on what you define as a full-scale drug -- internal drug discovery program. We could not, in my -- the way I do drug discovery, be competitive by doing all seven in-house. But, depending on your view of a "program," I think with end licensing, partnering, and with the current arrangement that we have with Johnson & Johnson through the Maxia acquisition, the number 7 is not an unreasonable number of possible shots on goal. But, internally to be able to put the kind of medicinal chemistry muscle that I have always felt is required to have a successful competitive discovery program with the number that we have of about 75 medicinal chemists, we can (ph) internally do full -- seven full discovery programs.

Okay. If I might take a second bite at the apple here. I will bundle these into a thought process here. Do you still think of yourselves as genomics advantaged, and if so, what do you still find advantageous about genomics assets? And if the answer to that question, I'm sure, partly relates to IP, it's clear that you wanted to keep the IP rights to the discoveries that came out of the info product over the last decade or so. With your discovery and development efforts, was it therefore this was one of the assets that, since you wanted to keep, it made selling the information business or spinning it out difficult?

I think on the first thing, we would not consider ourselves genomics-driven in our drug discovery and development. In our drug discovery and development opportunities, we are really more chemistry driven than genomics driven. We have, as Paul has discussed, a very substantial expertise base in certain areas of biology and in medicinal chemistry, and we select our drug discovery and development activities based on our expertise bases in biology, medicinal chemistry, and of course, in development and specifically in HIV for Reverset.

With respect then to our interest in the genomics intellectual property portfolio, that is primarily driven by the interest in external leverage, rather than in driving internal discovery processes. We do think that there have been and continue to be substantial opportunities for external leverage of that intellectual property portfolio. Clearly, we and others see that as a potential cash-generating asset, and clearly it is -- the fact that we unwilling -- were unwilling and are unwilling to include than in any sale of the information business had some impact on the attractiveness of that business as a spinout or sale?

Okay. Thanks very much. And (indiscernible) some good data in under a month, I think, right?

Yes. Absolutely.

Meirav Chovav of UBS.

Hi, It's both Meirav and Derik. And let me start. I have several questions about Reverset. I understand that the trial to be presented is in treatment AIDS patients, and I'm just wondering is this -- why in this patient population, considering that the uniqueness of the drug is supposed to be the sensitivity for K65R mutations? Correct me if I'm wrong in that regard. And also on the timeline, might be somewhat confused, but I seem to remember there was supposed -- there was some talk about starting Phase III in '04. So is there a pushback? And in terms of the Phase III patient population, what sort of patients are you going for and what sort of potential combination are you using and what are you comparing it against?

Well, so to begin, this is the first -- what we are doing in the first Phase II study is to get a feeling for the drug's potency in HIV-infected patients in a multiple-dose study, and to get some safety and tolerability data. So, this is a 10-day monotherapy study, which you really -- you don't want to do that in treatment-experienced patients, even though you're absolutely correct that 85 percent of the market is in treatment-experienced patients. So, this is the first of two Phase II studies, the second of which will be in treatment-experienced patients for a longer study period and with more patients. So, that is the trial that you recall beginning in 2004. We have never said that Phase III would start in '04 -- it was always '05.

Phase III, we are still discussing with our investigators and internally whether the best two pivotal trials would be both in treatment-experienced or whether we would do -- and furthermore, if we did two in treatment-experienced patients, would they be identical? Would there be replicates or would they be of slightly different trial design. And then the other option would be to do a naive study, which we would almost certainly do offshore, along with one study in treatment-experienced patients. We have not settled yet on which set of pivotal trials makes the most sense. We have time to consider that, and because of that, I'm also not in a position to describe for you what the different treatment arms would be.

Could you give us a little bit of color about things like food interaction for the compounds?

It won't have any food inter -- it is a nucleoside. There is a food effect, but there won't be food interactions. The food effect is one, as we have said before, requires the drug to be given on an empty stomach, either a period of time before breakfast, several hours after a meal or at bedtime. And we have completed a study, a ClinPharm (ph) study, actually, where we have gone through a number of different possibilities for this once-a-day drug to see what the most optimal time-on-time (ph) during the day would be most advantage for patients to take it. But again emphasizing, it is once a day, which makes it relatively easy to find a point during the day when you could take a drug whose absorption is diminished by food in the stomach. If the drug had to be taken more than once a day, that would be problematic.

Okay. And Derik has a question.

Could you just review -- if I remember correctly, does not show mitochondrial toxicity. Could you just go over the toxicity profile a bit?

That is correct. Before I do that, Derik, there is one other part of Meirav's question that I want to address, and that is, we know from cell culture experiments the concentrations that we need to have the potential to cover K65R, which is one of the more interesting mutations that we would like to be able to cover. I am hoping that when we present our data at Retrovirus and during our conference call that we will have some positive news to report vis-a-vis the pharmacokinetics in this first Phase II study. So can you repeat your question, please?

This was basically just review the toxicity profile.

The toxicity -- you remember that we have done a significant amount of mitochondrial toxicity testing, and we find that the levels that you have to go -- very high micromolar levels to see any mitochondrial toxicity, are far, far higher than anything that we are going to see in patients. So, we have a significant degree of confidence that mitochondrial toxicity will not be seen. Additionally, in the Phase I single-dose study, up to the highest dose tested, we saw no side effects any different or more frequent than we are seeing with the placebo subjects.

One last question. The data to be presented, would you be able to show with only 10 days of treatment a decrease in viral load, or are you even looking at that?

For sure. You may recall again from what I thought was a very cleverly-designed Phase I single-dose study that Pharmasset conducted -- that was done in patients -- in HIV-naive patience, and even after a single dose -- this is one of the reasons we are pretty interested in this compound -- even after that single dose, we got 0.4 log (ph) drop, which is a very substantial drop after a single dose, and the viral load was still dropping at 52 hours, which was the last time point that was taken in measuring viral load in those patients. So, I would predict that we are going to see a fairly profound viral load drop in these 10-day studies, which we certainly will report on at the Retrovirus meeting.

Okay. Thank you very much.

(OPERATOR INSTRUCTIONS) Craig West of AG Edwards.

Hi, everybody. The inevitable can you hear me question?

Yes, we can.

With headsets and phones, there's probably five mute buttons, so I have to make sure all are off. I was wondering if you could tell us a little bit more about the BKL productline. The revenue guidance is low, but yet you say revenues are stable, it requires little investment, it's cash flow positive. Is that correct -- that productline is making money even on the 7 to 9 million in revenues? And then you also mentioned costs, 10 million of them related to both the BKL and the IP. And I just wondered can you give us some color as to the costs related to the IP, how much and what are they?

With respect your first question, BKL, I don't know if productline was in fact cash positive in 2003. It is certainly our hope that it will continue to be so in '04, but we have been very conservative about projections for the revenue. So, our revenue projections are actually substantially conservative of what we might hope that BKL would achieve, even on the 2003 model. Dave, would you want to --?

In terms of the 10 million, I think the Company really won't break that out in terms of guidance this year (indiscernible) we reiterate that from a guidance perspective on the revenue side, we do want to be conservative. As I noted, it's all contractually committed revenue at this point in time.

The other thing I guess I would add is we expect substantial cost savings from the transfer of the intellectual property portfolio's management from Palo Alto to Wilmington.

That based on people?

That's based on people and on the mechanism of managing the portfolio.

And that said, Craig, there is transitional expenses still in 2004 as well, in that $10 million number.

Okay. I appreciate you taking the follow-up.

David Witzke of SunTrust.

Thanks for the follow-up. Paul, I wondered if you could give us some insight in the CCR2 antagonist program Phase I. Is it definitely healthy volunteers or would you consider going in RA patients, and how do you think about other indications, like MS, that seems to have some correlation with this receptor?

Let me give you -- I hope it is not too long-winded in the answer. But Millennium, as you know, has decided to go into Phase II with a monoclonal antibody that has shown what I call surrogate proof of principal in normal subjects, not in patients. And they do that in the same manner that we have recorded in nonhuman primates with our oral (ph) small molecules. It is basically a delayed type hypersensitivity reaction, where it is like a tuberculin test. And what you see in the histology of biopsies of a positive tuberculin test, where you get that big, raised, red, hard lesion, if you look at it, it is filled with mononuclear cells, many of which are macrophages. That is like a from (indiscernible), if you will, of what, for example, the inflamed synovium looks like in rheumatoid joints.

So, we plan to, on our Phase I study -- which we haven't described publicly yet, but I guess I can mention it now, right? We are going to combine single multiple dose in Phase I. That will save some time. In other words, you don't ramp all the way up to your highest single-dose high doses before you begin lower doses multiple-dose study. And in the multiple-dose study, we will do the DTH surrogate proof of principle. And there is no reason to think -- personally, although you can never be certain -- would be flabbergasted if we get the right blood levels if we will not see the same thing that we saw in nonhuman primates -- very dramatic responses, which I know that you have seen, and which Millennium saw, at least verbally. I never seen the data, but I assume they saw it, in their Phase I studies in normal subjects. So, we will not do Phase I in patients. We will do our first patients in our first Phase II study.

With respect to your last point, MS is an interesting possibility if you believe in the EAE rodent model and its reflecting reasonably accurately the pathophysiology of the human disease, because you get a dramatic effect with the CCR2 knockout atom -- that is, you get absolutely no disease in that model. So, that is an intriguing patient population for a CCR2 antagonist, as are not only rheumatoid arthritis, but all of the other inflammatory arthritities, psoriasis possibly, Atherosclerosis, neuropathic pain. There are a very large number of indications in important and unfulfilled therapeutic areas. And we, most likely with a partner, I think would like to explore those in parallel as opposed to in sequence.

Are you in GLP talks at this point?

We have finished the in-like (ph) portion and have unofficial -- we have the chemistry and the hematology, and the verbal reports on what the slides look like. I can't get into all of the right now, but I will tell you that we have not changed our timelines at all.

Thank you.

At this time, I would like to turn the floor back over to Paul Friedman for any closing remarks.

Thank you. I appreciate everybody who is online, calling in and listening to us. This was a very important conference call for us, a very big decision for us. We believe it is unquestionably the right decision, and we are very bullish on where we are and where we're headed in discovery and development, and I hope that those of you listening feel the same way. I look forward to speaking to you again soon. Thank you very much.

Thank you, callers. This does conclude today's conference. You may disconnect your lines at this time and have a pleasant day.