Infinity Pharmaceuticals Inc (INFI) 2003 Q1 法說會逐字稿

Please stand by. Your conference will begin momentarily.

Good morning. And welcome, ladies and gentlemen, to the Discovery Partners International first quarter 2003 financial results conference call. At this time I would like to inform you that this conference is being recorded and that all participants are on a listen-only mode. At the request of the company, we will open up the conference for questions and answers after the presentation.

I would now like to 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 Chief Executive Officer of Discovery Partners International and I would like to welcome you to Discovery Partners first quarter 2003 financial results conference. With me today is Craig Kussman, Chief Financial Officer of Discovery Partners.

In this call we plan to review the results of the quarter ending March 31, 2003 and update the guidance for 2003. As you know, I'm obliged to remind you to consider the following Safe Harbor statement regarding forward-looking statements.

Statements in this conference call that are not strictly historical are "forward-looking" statements within the meaning of the Private Securities Litigation Reform Act of 1995 and involve a high degree of risk and uncertainty. The company's actual results may differ materially from those projected in the forward-looking statements due to risks and uncertainties that exist in the company's operations, our development efforts and our business environment, including the establishment of offshore chemistry operations, our ability to establish collaborations, execute more profitable business and realize operating efficiencies, our ability to achieve expected growth and earnings per share in 2003, the integration of acquired businesses, and the trends toward consolidation of the pharmaceutical industry, quarterly sales variability, technological advances by competitors, and other risks and uncertainties more fully described in the company's annual report on Form 10-K for the year ended December 31, 2002 as filed with the Securities and Exchange Commission and other SEC filings.

As those of you who are listening in the Web cast know, this conference call is publicly available by live Web cast on our Web site at www.discoverypartners.com. This call is the property of Discovery Partners. A copy of the prepared remarks of this call as well as the earnings release issued this morning, have been furnished to the Securities and Exchange Commission on Form 8-K. Now, I will turn the call over to Craig Kussman, Discovery Partners CFO, to discuss our financial performance.

Thanks, Riccardo and good morning.

Revenues for the first quarter of 2003 were $12.7 million, an increase of 27 percent compared to $10.0 million for the first quarter of 2002 and three percent above the $12.4 million result in the fourth quarter of 2002.

Revenues for the first quarter of 2003 included a zero point six million dollar termination payment related to one of the company's unprofitable contracts and a zero point two million of revenue from our X-Kan development project, which had been expected to be recognized in Q4 of this year at the completion of the project. We will continue to recognize X-Kan revenues throughout the duration of the project based on the structure of the contract with Glaxo SmithKline.

The increase in revenues was due to the continued wrap up of the company's major exclusive chemistry collaborations, which more than offset declines in non-exclusive chemistry collaborations. Gross margin as a percentage of revenue for the first quarter of 2003 was 28 percent, up from 27 percent in the fourth quarter of 2002 and down from 41 percent in the first quarter of 2002. The increase in the gross margin percentage versus the fourth quarter resulted from higher volumes and the reversal of an anticipated contract loss accrual associated with the exit of our non-exclusive compound supply business, which added zero point four million dollars to income.

This was offset by zero point six million dollars of increased loss reserves for an exclusive fixed price compound supply contract resulting from the decision to consolidate the Tucson site into other facilities and zero point two million of other inventory and asset write-offs. The decrease in gross margin versus the prior year resulted primarily from a shift in development resources to billable resources in connection with the company's Pfizer collaboration. And the aforementioned increased loss reserves and write-offs, which were partially offset by higher volumes and the aforementioned accrual reversal.

Research and development costs for the first quarter of 2003 were zero point seven million dollars, down from one point one million dollars and one point nine million dollars in the fourth quarter of 2002 and the first quarter of 2002 respectively.

The decrease in research and development costs versus the fourth quarter resulted from the completion of development activities associated with the company's Micro ARCS screening platform and the company's computational tool kit.

The decrease in research and development costs versus the prior year resulted from the shift in development resources to billable resources under the Pfizer collaboration and due to the completion of the aforementioned development activities.

Sales, general, and administrative, or SG&A costs for the first quarter of 2003 were three point one million dollars, up from two point four million dollars in the fourth quarter of 2002 and down from three point three million dollars in the first quarter of 2002.

The increase in SG&A and costs versus the fourth quarter was in line with expectations and is consistent with our historical levels of expenditures.

The decrease in SG&A costs versus the first quarter of 2002, resulted from a higher focus on cost containment.

Net income for the first quarter ended March 31, 2003 was zero point three million dollars, or one cent per share, compared to a net loss of zero point eight million dollars or three cents per share in the first quarter of 2002. And net income of zero point two million dollars, or one cent per share, excluding 51.1 million of asset impairment charges in the fourth quarter of 2002.

As I mentioned earlier, net income for the quarter included offsetting impacts to reserves relating to our amicable contract termination and our decision to consolidate our Tucson facility. Cash and short-term investments at March 31, 2003 were $69.7 million, which increased by zero point one million dollars over the balance at December 31, 2002, despite the payment of two million dollars in license fees to Abbott in connection with the Micro ARCS screening technology platform and the repurchase of 115 thousand shares of DPI stock on the open market. Now let me ask Riccardo to review the operations for Q1.

Thank you, Craig.

I'm very pleased to again report that the company has achieved record revenues. We have achieved positive EPS and we continue to announce an impressive array of operational and business developments accomplishment. Craig has already discussed the financials and therefore, I will now spend the next few minutes summarizing today's announcement and then review the business and highlights for the quarter. Let me start by commenting on the company's announcement of the consolidation of its domestic chemistry facilities into two centers of excellence. In South San Francisco, the primary screening library reside in simplistic programs and in San Diego the lead optimization and the addition of chemistry projects. Last year, we expanded our facilities in South San Francisco, primarily to accommodate the increased workload for Pfizer. We can now take advantage of the significant level of efficiency that we have achieved in this project over the past six months and under the conclusion of the last non-exclusive compound supply contract, to free up sufficient space and capacity to enable us to consolidate several projects now in Tucson in to South San Francisco and San Diego.

These actions will require the transfer of some people, but the gain efficiency more than justifies the cost and any short-term disruption. DPI originally established a presence in Tucson with the acquisition of SIDDCO in January, 2001. That acquisition provided us with a very capable group of scientists, engaged in development - developing first-class chemistry in an impressive group of customers with long-term relationships and contracts. The Tucson site, in addition, provided us with room for expansion at a time when were operating at capacity in the facility we shared with Pharmaceutical. The current situation allows us to retain as many scientists as practical but transferring them to our expand in South San Francisco facility and San Diego, while of course continuing to work with all of our current customers.

This action will establish two very strong, focused centers of excellence for all of our chemistry activities in the U.S. At the same time, the availability of capable scientists and facilities has substantially lowered costs in other parts of the world, gives us opportunity to transfer some processes off shore and further optimize our core structure. Over the next few months we will therefore move aggressively to establish an off shore chemistry capability and gradually shut down our Tucson operation. It is an important and complex strategic move and we are, of course, actively working with our customers to assure a smooth and successful transition. We are determined to maintain our positive urban momentum. And to do so we need to continue to exploit all opportunities to improve our operation and our core structure. Regrettably, this sometimes affects people's lives with disruption, relocation, or even redundancies as in the closure of the Tucson operation.

Given the recent accounting pronouncement concerning facility closure, it is premature to forecast the exact timing of any one-time charges for these actions. We expect, however, to be able to effect the closure of the Tucson site, any employee relocation or termination costs, and the start-up of an off shore facility by the end of Q3, 2003. And expect to incur between one and two million dollars in one-time costs.

Let me now briefly address the other DPI achievements during the quarter. First of all, we shipped and installed the first Crystal Farm Imaging System to the protein crystallography group at University of Georgia. We are now manufacturing several units and are still optimistic about meeting our annual objectives on this launch despite a dampened environment for capital equipment sales into the pharmaceutical market. We've paid the last two million dollars installment to Abbott Laboratories for the acquisition of worldwide, exclusive rights of the Micro ARCS technology. I'm also pleased to report that during the quarter we signed an R&D collaboration with a major global pharma partner under which our exclusive Micro ARCS technology will be evaluated with a variety of normal assays and proprietary compounds. Unfortunately, I'm not a liberty to disclose the name of this partner at this time.

We continue to perform at or better than planned in our collaboration with Pfizer. Operationally, this is our largest program and we are extremely pleased with the productivity of our team now that they have completed the wrap up phase of this ambitious program. And we expect that the consolidation of the complete project in South San Francisco to further improve efficiency. We greatly increased our share of business in Japan by signing a significant expansion to an existing biology agreement with our largest Japanese customer and a new significant screening collaboration with another major pharmaceutical company. We have always has had several strong collaborations with Japanese companies, both for chemistry and in super screening.

With a continued growth of this business, we are now in a position to establish a direct local permanent business development presence. We expect that this will result in advanced communication with our existing collaborators and increase visibility on new opportunities. In the last two earnings conference calls, we communicated our concerns on the status of the biotechnology and pharmaceutical industry. Nothing has significantly changed in the past three months to provide the overall business picture and fundamental outlook. However, our shootable backdrop continue to be higher than at the same time last year and we are therefore reasonably comfortable in reconfirming growth for 2003 at a double-digit rate while our previous guidance of positive EPS would be, of course, reduced by the one time charges associated with the closure of the Tucson facility.

Our stock price continues to perform at a disappointing level on minimum of total volumes. The company has reconfirmed the authorization from the Board of Directors to execute the stock repurchase program under which Discovery Partners may acquire up to two million shares of its common stock in the open market or otherwise. As Craig already mentioned, during the last three months we have repurchased 115 thousand shares on the open market. This concludes the first part of our conference call. I am available to answer questions at this time and we urge investor and analysts to ask any and all questions as we will not be responding to individual calls and questions regarding acquisitions, financial results, or financial guidance following the conclusion of this conference call.

Thank you.

Thank you, sir.

The question and answer session will begin at this time. If you're using a speakerphone, please pick up the handset before pressing any numbers. Should you have a question, please press star, one on your push button telephone. If you wish to withdraw your question, please press star, two. Your question will be taken in the order it is received. Please stand by for your first question.

Our first question comes from with RBS Securities. Please state your question.

Hey, guys. Nice job.

My question is regarding the new deal, the R&D deal signed with the major global pharma partner. Could you give us an idea of how big that is or how long that runs?

OK. So you wanted to find out how long or how big the deal was? This is an evaluation - a technology, an evaluation deal, it's an R&D program which probably launch stuff for the next six months at the end of which the pharmaceutical will make a - will be first of all revealed and second offered to make a decision to acquire the technology for use throughout their facilities. So at the present time this is a limited term evaluation deal for our technology.

OK. Great. And could you give us a little bit more color on the expanding your business share in Japan? I kind of got a call. I kind of missed that.

Yes. There are, unfortunately, a fairly large pharmaceutical company these days want to keep their name private. Therefore we cannot give any individual names. However, we have usually used the term significant to indicate collaboration, which are over a million dollars in size.

Yes.

So also the two collaborations, one that we already have and we expanded, and the new one are over that amount of money.

OK. So you added an additional one plus expanded on your existing one?

Correct.

And those ...

There are two different customers.

Yes. And those would both be characterized as significant deals?

Right.

The expansion as well?

Correct.

OK. Great. And what was - what's the backlog now?

The backlog depending on how you measure business that's under contract but for which we haven't yet received a work order for, is between 40 and a half million, 40.5 million and 42.5 million.

So ...

That's a full year and that includes - that includes the first quarter revenue number.

So between 40.5 and 42.5?

Correct, for this year, for 2003 only.

Right. Great. And would you say that the success that you had in the quarter was primarily driven by the extension of a contract or the signing of new deals versus product placement? I mean was the growth in from products or do you have some idea?

We say it fundamentally was the reaching order steady state and on part of the Pfizer deal that was a big part of it and various contracts that had been obtained in the last six months. It's more due to contracts than to products, if that's the question.

Yes. Thank you.

And in the gross margin improvement was more, I think you mentioned so I just want to confirm, it was more to having to do with the contract part of the business than is the chemistry part of the business?

That is correct.

OK. Great. And finally I was wondering if you guys could give us a little bit of an idea of what's happening with Crystal Farm. I know you put your - you said you placed your first product. That's not a - that's a sold system, right? That's not a system?

That's a sold system that has been paid. And the unit is operational and is working. We have several quotes worldwide to both pharmaceutical company, universities, research centers around the world and these things take a normal time either to get into budget or to get ordered. But we - given the amount of activity, we still are - we still are on plan for our goals for the year and as we go forward and start producing the units.

Can you say how many of them you would hope to place or ...

I would - I have not revealed a specific number before. I will - I will wait until I get a few orders under my belt before I stick my neck out.

OK. But things are looking good in that department. You feel confident.

So far, so good. Although it's a - it's a tough environment for capital expenditure. People are sort of scrambling with budgets, but they tell us or at least that they need this one.

Yes. And along those lines, I mean, are your - this product is mainly - I mean, is it a product that's sold, really, into sort of the basic research segment where we're seeing a lot slowdown or is it sold to, you know ...

I think it's basically research. It's basically on the front end of so it's sold to biotech company, pharma company and universities research centers.

OK. Great. Thanks, guys.

Thanks.

Thank you.

Thank you. As a reminder, should anyone have any further questions, please press star, one on your push-button telephones at this time. Our next question comes from with . Please state your question.

Hi, guys. It looks like a nice quarter. On Crystal Farm I'm thinking about all the scientists that are thanking you for not having to sit in the freezers looking at a microscope anymore. But I'm also trying to size up the opportunity and wanted to get a better sense of how are you pricing the Crystal Farm unit? Would you talk about that?

Yes. The unit is priced at around $250,000 a unit. That's sort of the loose price for the unit. Clearly, there are some consumable that goes with it - microplates. There will be, in the future, software additions. But the overall pricing you can look at it about a quarter of a million dollars a unit. And the fact that every location could consumably have more than one unit because each unit runs at a specific temperature and usually these experiments are done at two or three different temperatures.

OK.

Now we can change it, obviously, but the wealthier one will buy more per unit.

OK. What does the consumables piece look like? The 250 is just for the unit, right?

They are just plates that are used in the - and carriers to . Like a microplate - it could be more complex or more sophisticated. But just like a microplate.

OK. How many do you think you can produce per year, given ?

Well, if I - if I can get orders that can produce them, let me put it this way. I mean, at the present time, we're producing in house. Should the thing pick up substantially, we - all of the big sub assembly of the units are outside the company anyway. So it's easy for us to ramp it up.

OK. The second question - the final two million installment to Abbott, was that taken out of cost of revenues this quarter?

No, they will be - is - on the balance sheet?

Yes, correct. It's up on the balance sheet as - in our - excuse me. It's in our patent license rights and other intangible assets.

OK.

And it represents a prepaid royalty.

All right. Thank you. That's all I have for now. I'll jump back in queue.

All right. Thanks.

As a final reminder, should anyone have any further questions, please press star, one at this time. Our next question comes again from with .

OK. It's me again. Now that the Pfizer Pharmacia acquisition is completed, where do you see your business going with Pfizer? And also, could you comment on what percentage of revenues they represented this quarter?

Let me get, first of all, the point about how the business is going with Pfizer. The answer is very well so far. I mean, we have been meeting all of the criteria that Pfizer has asked us in terms of number of compounds to be delivered, when and what. So they are very pleased with us. At least so they tell us. So I don't see any downside issues at the present time. We are not seeing, to be honest, any specific impact due to the pharmacia, but probably it's too early to see that percolated through the individual projects. We have been talking about various extension or expansion of things, but nothing that I can say concretely that has shown at the present time.

OK. We got any percentage of revenue, Craig?

Fifty-five percent for the quarter.

OK. And where do you see that going forward? Is it going to remain at that level or do you expect it to decline or increase for the rest of the year?

I would say it would - it would - should stay fairly steady at that level.

OK. Thanks.

Thank you, Dan.

If there are no further questions, I will now turn the conference back to Mr. Pigliucci for closing comments.

I would just like to thank all of you for the participating in the conference call and I look forward to talk to you again soon. Thank you very much.

Ladies and gentlemen, if you wish to access the replay for this call, you may do so by dialing 1-800-428-6051 or 973-709-2089 with an ID number of 288818. This concludes our conference call for today. Thank you all for participating and have a nice day. All parties may now disconnect.