Infinity Pharmaceuticals Inc (INFI) 2002 Q4 法說會逐字稿

Good morning and welcome, ladies and gentlemen, to the Discovery Partners International fourth quarter 2002 financial results conference call. At this time, I would lake to inform you that this conference is being recorded and that all participants in a listen only mode. At the request of the company, we will open the conference up for questions and answers after presentation. I will now turn the conference over to Mr. Riccardo Pigliucci Chairman and CEO of Discovery Partners international. Please go ahead, sir.

Thank you and good morning. I'm Riccardo Pigliucci, Chairman and CEO of Discovery Partners International and I would like to welcome to you Discovery Partners fourth quarter 2002 financial results conference call. With me today are Craig Kussman, Financial Officer of Discovery Partners, and Taylor Crouch, President and Chief Operating Officer. We plan to review the results of the quarter and the year ending December 2002 and the guidance for 2003. As you know I am obliged to remind you to consider the following Safe Harbor Provision statement. Statements that are not strictly historical are forward-looking statements. And involve a high degree of risk and uncertainty. The (ph) companies actual results may differ materially from atrocity projected in the forward-looking statements due to risks and uncertainty that exist in the company's operations. The development efforts and business environment including the integration of our acquired businesses, the trend towards consolidation of the pharmaceutical industry, quarterly sales, technological advances by competitors and other risks and uncertainties. More fully described in the company's annual report 10K for the year end December 31, 2001 as filed with the Securities and Exchange Commission and other SEC filing. In addition, this conference call is publicly available by the live web cast on Discovery Partners International website at www.discoverypartners.com. This call is the property of Discovery Partners. Any redistribution, retransmission or rebroadcast of this call by any form without expressed written consent of Discovery partners is strictly prohibited. Now I will turn the call over to Craig Kussman, Discovery Partners CFO, to discover our financial performance.

Thanks, Riccardo and good morning. Revenues for the fourth quarter ending December 31, 2002 were a record 12.4 million dollars. 13 percent above the fourth quarter of 2001 and 17 percent above the third quarter of 2002. Due to the continued ramp up of our chemistry collaborations with Pfizer and Merck. Gross margin as a percentage revenue for the fourth quarter of 2002 was 27 percent, down from 49 percent in the fourth quarter of 2001 and 34 percent in the third quarter of 2002. Decreasing gross margin percentage versus the third quarter resulted from higher than expected losses incurred on one of the company's fixed price chemistry contracts. As well as the expected lack of high margin chemistry license fees. The decrease in gross margin percentage versus prior year resulted from the shift of development expenses to cost of revenues in the company's multi year chemistry collaboration with Pfizer as well as the prior mentioned fixed price contract loss. Research and development costs for the fourth quarter of 2002 were 1.1 million dollars, down from 3 million dollars in the fourth quarter of 2001 and 1.3 dollars in the third quarter of 2002. The decrease in research and development costs versus the third quarter resulted from the wind down of development efforts on the company's crystal farm and microarts technology platforms. The decrease in research & development costs from the prior year resulted from the prior mentioned shifted development expenses to cost of revenues as well as the company's a decision to discontinue development of chemical compounds for sale out of inventory.

SG&A costs for the fourth quarter of 2002 were 2.4 million dollars, down from 2.8 million dollars in the fourth quarter of 2001 and 3.5 million dollars in the third quarter of 2002. Decrease in SG&A costs versus the third quarter resulted from the absence of executive relocation costs and inclusion of timing benefits associated with the required reversal of certain accruals. Decrease in SG&A costs versus prior year resulted from the required reversal of accruals combined with the decrease in travel costs which were partially offset by increases to staff. Goodwill amortization in the fourth quarter of 2002 was zero, compared to 1.5 million dollars in the fourth quarter of 2001. During the fourth quarter, we completed our annual asset impairment testing in connection with the adoption of FAS 142, goodwill and other intangible assets and FAS 144, accounting for the impairment and disposal long life assets and determined that due to the fact that the company's market capitalization was significantly below net book value an indicator of potential impairment existed. After performing our evaluations reviews in accordance with FAS 142 and FAS 144, it was determined that all of our goodwill totaling 50.9 million dollars plus $200,000 of acquired customer list should be written off. Nevertheless we believe that our future operating results will demonstrate the substantial value of our technologies and capabilities. Net loss for the fourth quarter ended December 31, 2002 was 50.8 million dollars or $2.09 per share compared to a net loss of $1.6 million or 7 cents per share in the fourth quarter of 2001. Excluding the 51.1 million dollar impairment charge, net income for the fourth quarter ended December 31, 2002 was positive 0.2 million.

For the 12 months ended December 31, 2002, revenues were 41.3 million dollars compared to 41.1 million dollars for the same period in 2001. The slight increase in the year over year top line performance reflects decreases in nonexclusive compound supply, legacy instrumentation systems, consumables and screening revenues which were offset by higher chemistry services and exclusive compound supply revenues. Gross margin as a percentage revenue for 2002 was 14 percent, down from 40 percent in 2001. Excluding the 5.8 million dollar provision for discontinued products and a 1.5 million dollar provision for an anticipated loss of contracts in 2002 and a 4.4 million dollars provision for obsolete inventory in 2001, gross margin percentages were 32 percent and 50 percent in 2002 and 2001 respectively. The year over year decrease in gross margin percentage resulted from the previously discussed shift of development expenses to cost of revenues, lower volumes and the previously discussed chemistry contract loss. Research and development costs for 2002 were 6.2 million dollars, down from 13 million dollars in 2001. Decrease in research and development costs resulted from the shift of development expenses to cost of revenues as well as the decision to discontinue the development of chemical compounds we sold out of inventory. SG&A costs for 2002 were 12.53 million dollars up from 11 million dollars in 2001. The increase in SG&A costs versus 2001 is primarily due to increases to staff. Net loss in the 12 months ended December 31, 2002 was 62.1 million dollars or $2.55 per share compared to a net loss of 11.1 million dollars for 46 cents per share in the same period of 2001. Excluding the 51.1 million dollar impairment charge, net loss for the year ended 2002 was 11 million dollars or 45 cents per share. Cash and short-term investments including restricted cash of December 31, 2002 were 70.6 million dollars, down 0.2 million from our cash ambulance at December 30, 2002 primarily due to the negative impact of foreign exchange rate changes. Now let me ask Riccardo to review the operations for Q4 and the key mile stones for 2003.

Thank you, Craig. I'm very pleased for the second time in two consecutive quarters to report that the company has achieved record revenues an exceeded analysts expectations. Excluding the impairment charges we also for the first time achieved positive EPS and announced an impressive array of operational and business development achievements. Craig has already discussed the financial highlights. Therefore I will now spend a few minutes summarizing the business achievements of the quarter in the year and reiterate our guidance for the 2003. Let me start by commenting on the company's major contract. We are pleased to report that we have now achieved the scale up and production rate of compounds required under our multi year agreement with Pfizer and have met the time lines required for the delivery of these exclusive compounds. It is extremely important program is proceeding on plan both scientifically as well as financially. We are looking forward to continued positive performance over the next three years. During the quarter, as Craig mentioned in his comments on gross margin, we recognized the loss on a fixed price compound development contract for another customer. Ret assured we are actively putting into place operating measures to minimize and hopefully (ph) totally avoid future recurrences of margin erosion of this magnitude while striving to maintain scientific excellence and good customer relations. Our successful was further by Doug Livingston (ph). He joined DPI as senior Vice President of chemistry and bangs 20 years of experience, heading research management physician in the pharmaceutical industry including upJohn, La Jolla pharmaceutical and most recently the Genomic (ph) Institute. In the integrated Discovery (inaudible) we have existing program with (inaudible) genetics and have signed a an agreement with NOVARTIS.

We will provide assay development and biological screening for several (ph) NOVARTIS targets. In another major development, Discovery partners successfully extended its Jeanous toxicology patent which had been challenged by major pharmaceutical and biological companies. With this achievement we plan to more vigorously assert our intellectual property rights. Our microarts platform continues to be well received by multiple large pharmaceutical and biological companies and we are optimistic about being developed by customer in the not too distance future If technology adoption is painfully slow in the pest of times and is a real challenge in the current economic (inaudible). It certainly has been a while since our but we are now pleased to announce a significant new contract to quip Glaxo SmithKline with our proprietary technology. Assistance we will be delivers to GSK operates on the same technology at the original nanocam platform. But a tradeoff for the number of pounds produced for an increase in the quantity of each compound.

This system to be delivered at GSK's facility in -- in the UK and king of -- in the U.S. will enable GSK to produce sufficient quantities for storage in corporate archives. In the last few months, our Discovery technology group has been very busy and just last week introduced crystal farm, a fully integrated system designed handle up to 300 plates for protein kiss stalization. That is over 100,000 simultaneous protein crystallization experiments, a level never before achieved in a laboratory system. These areas of Discovery is rapidly becoming very important and a major bottle neck in the efforts to use structural driven design as a tool to improve Discovery. This product will allow Discovery partners to closely cooperate with the leaders in the field to provide the tools they need and to add extend capabilities to our added Discovery offering. My opening remarks this has been a great quarter and the culmination of a year that has seen major developments in the company. Even in this challenging economic times. We successfully retoold our chemistry operation to satisfy the quantity and purity requirement of the Pfizer and Merck contracts. We continue to expand our Discovery collaboration and continue to add new customers. We completed the development of microarts and started its deployment in our screening operation and commercialization to large . We developed (ph) crystal farms, we expanded our customer base and substantially expand for (ph) our senior capability with the addition of Taylor Crouch and Doug Livingston and we continue to improve our financial reporting and control systems.

We ended the year with record revenues and increased ship (inaudible) background. We did all of these while striving and managing to conserve our cash and to reach profitability. One set back at the end of 2002 was the loss of a copper our former scientific officer. Abe died in December losing his eight month battle with Colon cancer. He was instrumental in the startup and we will never forget his contribution, he will be missed by the Discovery partners family and by everybody who had the good fortune to work with him. In the last earning conference in October, we communicated our concern on the status of the patent technology and pharmaceutical industry. Nothing has significant changed in the past three months to revise the overall business picture and fundamental outlook. However, our shippable back log is now high are than at the same time last year and we are therefore more comfortable in forecasting growth for 2003 at double digit rates. We remain cautious on our expenses and forecast reduce R&D expenses and flat SG&A as a percentage sales. We expect gross margin percentages to be at or above 2002 levels and bottom line EPS to remain positive for the year. Even the nature and level of our business to reflect revenue can of course have a significant impact on reporting net income.

Our stock price continues to perform at disappointing level, minimal trading volumes. The company has reconfirmed the authorization from the board of directors to execute a stock repurchase program under which Discovery partners may acquire up to 2 million shares f its common stock on the open market or otherwise. During the last three months, we have repurchased a mod Defendant amount of shares on the open market. This concludes the first part of our conference call. I'm available to answer questions at this time and we urge you investors and analysts to ask any and all questions as we will -- be responding to individual calls and questions regarding our positions, financial results or financial guidance following the conclusion of this conference call. Thank you.

Thank you, sir. The question and answer will begin at this time. If you are using a speaker phone please pick up the handset before pressing any numbers. Somehow have a question, please press star one on your push button telephone. If you want to withdraw your question press star two. Your question will be taken in the order it is received. Please stand by for your first question, sir.

Our first question comes from Iris Franconia (ph) from UBS Warburg. Police state your first question.

Actually, I have a couple of questions. But the first one regarding GSX and your contract. The wording means something, but can you remind us the science that is associated with the word significant in your statement?

Sure. Let me remind the guidance that we have given in the past regarding our statement. We do not normally disclose the amounts of any specific collaboration most of the time because our partners don't want that. But we have given guidance about a year ago, basically we do not normally issue any press release for anything below $500,000 over our deal unless that is a major entry into a new business. If we or a new technology. If you call a major agreement is a multi year deal with expected revenues in excess of $5 million. A significant (inaudible) is a deal with total expected revenue greater than a million. And long-term agreement is a deal with at least three years. So there were significant indicates in all cases that these deals are over 1 million and since they're not major they're not up to 5 million. So 1 to 5 million is the range you can use.

Okay. Now with regard to the new version of the nanocam system that you're shipping to GSK, what is your expectation in terms of timing for the shipment and the revenue recognition?

I probably would expect the shipment to happen towards the end of the year because we have obviously to modify the current nanocam system to increase the capacity of the various cams. It's the same system that so we would expect the time it is accepted by GSK and everything else to recognize revenue toward the end of the year.

Okay. Switching gears to the service side, you said you talked about this one contract, it was the turned unprofitable because it was a fixed price contract. On a percentage basis, how much of your contracts are 0 fixed price at this point?

I will say this is probably one of the few. In terms of fixed price. As you will recall on the Pfizer contract, we have been very careful to have all of the development side to be on the FTE basis and fixed price only the lower risk compound manufacturer, this is one of the few contracts that has that fixed price, actually one of the early contracts and we are obviously taking steps to make sure we can live with it.

Okay. And one thing that I noticed on all the announcements that you had, I'm not seeing major or significant chemistry collaborations coming in. What are you expecting given the current environment?

Excuse me? I can hardly hear you. Can you speak up a little bit.

Sure. I said regarding the announcements that you had, you mostly talked about biology (inaudible) screenings and technology based agreements, but you haven't really recently announced any kind of chemistry based agreements. So I was just wondering if you what have you in the pipeline, what your expectation are for '03?

Obviously, we have a plans in the pipeline that would be unwise of me to sort of comment on specific ones in this environment as you see in the gays of the GSK, nanocam it took a long time to mature, but all I can tell you that given our back log and given our pipe line we are estimating for next year double digit we feel reasonable about this guidance.

Okay. You addressed a backlog, can you actually give us some number, put some nouns that?

We have never, we have never give an specific number in backlog. Craig, do you want to comment more directly?

Yeah, our backlog right now for next year is about 38 to 39 million dollars, which is about 10 million dollars higher than it was 12 months ago going into 2002. So it's significantly improved versus last year.

Does that --.

We're not talking about booked business as much as shippable backlog.

Right. So that translates into about 75 percent of what, 70-plus visibility, if I am calculating correctly is that right?

Excuse me. You keep breaking up? I don't know if it's our phone or yours?

I said. That basically translates into about 70-plus percent visibility on your projected revenues for the year?

Correct.

If I get that right.

Okay. And I think that's actually it for me. Thanks very much.

Thanks.

Thanks Iris.

Just a reminder, ladies and gentlemen, if you do have a question, you may press star one on your push button telephones at this time. Our next question comes from Rodney Hathaway (ph) from Heartland Advisers. Please state your question.

Good morning. Just a follow-up on your nanocannibis. In the past, you've given us you know an idea of maybe the number of potential deals you have in backlog or RFPs, can you maybe give us the same type of guidance? Is there other potential nanocannibis in the pipeline for this year?

... to jump again, there's no question that the nanocan modification that we're going for GSK is appealing other customers. One thing that has changed in the last Lee year, I think I mentioned in the past is a change in the type of that people are making. Whether they're making hundreds and thousands of compounds in less quantity. Less compound at -- quantity per compound and purified. With this (inaudible), nanocams used to make a couple of milligrams up to a million of compound per year is now making maybe ten milligrams so five times as much and lower number of compounds. So this modification is extremely appealing to several other customers and we are discussing with many of them about either upgrading what they already have or entering or acquiring the technology. I will not like to give you a specific number because again it's so granular and predictable. But we obviously are very excited about the ability to give this product to other (inaudible) I think it would have immediate result for this year because as again if anything we'll be shipping the product towards the end of the calendar year.

And average selling price on the older generation machine, I think, was around that 4 million mark and I know you already gave some guidance on what a significant size deal is, but has the average selling price on this next generation changed technology (ph) from the old machine?

I would not say that the average selling price has changed materially. Different customer get different deal. You've seen the nanocan system is comprised of several individual units from system to automatically fill the cans to do the clearage to do the sorting. So each system is different. The system that GSK has purchased is within the gin of what nanocan was but it's two systems they purchased, but they have not purchased complete system, they were already our customer, so they already have some of the standard equipment for the cans handling.

And the modifications you have to do for this system for Glaxo, will those expenses be capitalized or expensed throughout the year?

It will be they'll be placed in work in process until the unit is actually delivered.

So your guidance in the press release of rebounding your gross profitability to previous levels is that takes into account the additional cost to modify this machine that will be shipped to Glaxo?

Yes, it does.

All right. Thanks.

As a final reminder ladies and gentlemen, if you do have a question, you may press star one on your push button telephones at this time. There are no further questions, I will turn the conference back to Mr. Riccardo Pigliucci to conclude.

I would like to thank all of you pour participating in this teleconference and I look forward to talking to you again soon. Thank you very much.

Ladies and gentlemen if you wish to access the relay you may do by dialing 1800-428-6051 or 973-709-2089 with the ID number. This concludes our conference for today. Thank you all for participating. Have a nice day. All parties may now disconnect.