Infinity Pharmaceuticals Inc (INFI) 2003 Q2 法說會逐字稿

Good morning and welcome Ladies and Gentlemen to the Discovery Partners International Second-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 in a listen-only mode. At the request of the company, we will open the conference up for questions and answers after the presentation. I will now turn the conference over to Mr. Riccardo Pigliucci, Chairman and CEO of Discover Partners International. Please go ahead sir.

Thank you and good morning. I am Chairman and Chief Executive Officer of Discover Partners International. I would like to welcome you to this Discovery Partner's Second-Quarter, 2003 Financial Result Conference. With me today is Craig Kussman, Chief Financial Officer of Discover Partners. In this call, we plan to review the results of the quarter ended June 30, 2003 and update the guidance for the second-half of 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 with the Privacy Security 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 operation, our development efforts and our business environment including the establishment of offshore operations, our ability to establish collaborations, execute more profitable business, and realize operating efficiency, our ability to achieve expected growth and earnings per share in 2003, the integration of acquired businesses, and a towards consolidation on a pharmaceutical industry or for the sales vitality, 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 ending December 31, 2002 as filed with the Security and Exchange Commission and other SEC filings. In addition, in response to Reg FD, we will no longer refer in our commentary or in answer to question on past, current or future results to non-GAAP financial measures such as EPS or gross margin before restructuring charges or other provisions, but we will only highlighted the magnitude of the charges included in the various periods.

For those of you who are listening by Web-cast now, 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 computer prepared remarks on this call, as well as the earning press release issued this morning had been furnished to the Security and Exchange Commission on form 8-K. Now, I will turn the call over to Craig Kussman, Discovery Partner's CFO to discuss our financial performance.

Thanks Riccardo and good morning. Revenues for the second-quarter ending June 30, 2003 were $11.2 million, 34% above the second-quarter of 2002 due to increases in exclusive compound supply and high throughput screening revenues which offset decreases in non-exclusive compound supply revenues. As expected, revenues for the second-quarter were $1.5 million below the first-quarter of 2003 due to the absence of a $600,000 one-time, non-exclusive compound supply contract termination fee and to seasonal patterns associated with our Xenometrics licensing revenues and our Merck compound supply contract. Gross margin as a percentage of revenue for the second-quarter of 2003 was 35% up from negative 61% in the second-quarter of 2002, which included provisions related to the discontinuation of the company's non-exclusive compound supply business equally 86% of revenue and up from 28% in the first-quarter of 2003. The improvement in gross margin is primarily due to the absence of the product line discontinuation provision, in savings and materials costs and other operating efficiencies. Research and Development costs for the second-quarter of 2003 were $0.7 million down from $1.9 million in the second-quarter of 2002 and unchanged from the first-quarter of 2003.

The decrease in Research and Development costs versus prior year is due to the redeployment of Development Scientists and Engineers that direct revenue generating activities. SG&A costs for the second-quarter of 2003 were $3.4 million up from $3 million in the second-quarter of 2002 and $3.1 million in the first-quarter of 2003. The increase in SG&A cost versus prior year is primarily due to additional personnel and increase benefits accruals which were partially offset by the absence of a payment made to a strategic consulting firm in the second-quarter of 2002. The increase in SG&A cost versus the first-quarter of 2003 is due to increased benefits accruals. Restructuring costs related to the closure of the company's Tucson facility were $1.6 million for the second-quarter of 2003 which included $0.9 million of costs to exit certain contractual and lease obligations, $0.4 million of severance and retention bonuses for an involuntary employee termination and $0.3 million of moving, relocation and other costs.

The company expects to incur a remaining $0.3 million during the second-half of 2003 which would place the total within the range communicated by the company in last quarter's earnings release. Interest income was $0.4 million for the second-quarter of 2003, a 10% decrease from last year due to declines in the U.S. interest rates and a decrease in the average cash balance. Interest income was $0.1 million lower than the first-quarter of 2003 due primarily to the absence of realized gains on investments. Net loss for the second-quarter ended June 30, 2003 was $1.3 million or 5 cents per share which included $1.6 million or 6 cents per share of restructuring expense related to the closure of our Tucson Chemistry operation. This compares to a reported net-loss of $9.7 million or 40 cents per share in the second-quarter of 2002 which included $7.3 million or 30 cents per share provision related to the discontinuation of the company's non-exclusive compound supply business. For the six months ended June 30, 2003, revenues were $24 million up 30% from the $18.4 million for the same period in 2002. The revenue growth was primarily due to increases in exclusive compound supply revenue and screening revenue, offset by decreases in non-exclusive compound supply sales. For the six months ended June 30, 2003, gross margin, as a percentage of revenue, was 32%, up from negative 6% in the same period in 2002, which included provisions related to the discontinuation of the company's non-exclusive compound supply business, equaling 39% of revenue.

Improvement in gross margin for the first half of 2003 was primarily due to the absence of provision related to the discontinued product line and lower materials cost associated with inventory cost management initiatives undertaken in 2003. Research and development costs for the six months ended June 30, 2003 were $1.4 million down from $3.8 million in the same period in 2002. Decrease in research and development costs versus last year is due to the redeployment of development scientists and engineers to direct revenue generating activity.

SG&A costs for the six months ended June 30, 2003 were $6.5 million, up from $6.3 million last year. The increase is due, primarily, to additional personnel and increased benefits accruals, which were partially offset by the absence of a payment to a strategic consulting firm. As mentioned previously, restructuring costs relating to the closure of the company's Tucson facility were $1.6 million in the first half of 2003. The company did not incur a similar expense in the same period of 2002.

Interest income for the six months ended June 30, 2003 was $1 million, unchanged from last year, due to offsetting effects of decline from U.S. interest rates and average cash balances and the absence of realized gains on investments. Net loss for the six months ended June 30, 2003 was $1 million or $0.04 per share, which included $1.6 million or $0.06 per share of restructuring expense related to the closure of our Tucson chemistry operation, compared to a recorded net loss of $10.4 million or $0.43 per share for the same period in 2002, which reflected $7.3 million or $0.30 per share provisions related to the discontinuation of the company's non-exclusive compound supply business.

Cash and short term investments at June 30, 2003 were $70.8 million, up $1.1 million from our cash balance of March 31, 2003, primarily due to a decrease in net fixed assets and due to timing differences associated with the restructuring expenses. Now let me ask Riccardo to review the operations for Q2 and the outlook for the remainder of 2003.

Thank you, Craig. I'm very pleased to again report to our current and potential investors a good quarter for Discovery Partners. We have achieved our expectation and we have continued to perform in line with the financial guidance previously communicated in our press releases and conference call. We have also continued to announce an impressive array of operational and business development accomplishments.

On the operational side, during the quarter we completed a closure of our Tucson chemistry facility on time, on budget and without affecting the performance on any other operation. We were also successful to retain over 50% of the scientific staff and to relocate them to our south San Francisco and San Diego operations. Also during Q2 we completed a multi research and collaboration agreement that gives Discovery Partners access to chemists and equipment at facilities located in India. We have already begun to operate in this facility and we expect to transfer additional projects, equipment and management from the U.S. during Q3. This initiative, coupled with the closure of Tucson and the previously mentioned savings in material cost and our operating efficiency makes us comfortable in our ability to sustain gross margin as percentage of revenue above 30%.

On the business development front, we continue to make good progress with our Crystal Farm crystallization and imaging system. We have now installed two more units at customers sites and we have entered into discussions with potential instrumentation and partners to allow users to obtain completely integrated crystallography solutions from crystal growth to imaging to X-ray refraction and structure determination.

We will also be present with a system and poster presentations at the annual meeting of the American Crystallographic Association being held in Cincinnati, Ohio at the end of this week. On June 2nd, we announced a significant 3-year collaboration with Actelion, a biopharmaceutical company headquarters in Basel, Switzerland. Under the terms of this agreement, Discovery Partners scientists would compliment and expand Actelion's discovery programs.

During our first quarter conference call, I mentioned Discovery Partner's success in obtaining business in Japan. In Q2 this trend continued with additional contracts with Seikagaku, and . In the last three earnings conference calls, we communicated our concern on the status of the bar technology and pharmaceutical industry. While we are starting to see signs of renewed investments in some larger companies, the founding outlook for most bar technology operations remains unchanged. And therefore, we continue to be cautious in our fundamental outlook.

Although in the first six months of this year we have achieved revenue growth of 30%, this was primarily due to the shipment of compound supplies that were at a minimal level in the same period of last year. Starting with the next quarter, the mix and magnitude of our business will be more comparable to last year. And we therefore expect the overall growth for the fiscal year to b in the teens, in line with our prior guidance of double-digit growth. With the closure of Tucson almost completely behind us, we are also comfortable in projecting positive reported earnings for the second half of this year.

Our stock price has performed much better in the last quarter and appreciating about 60% from April 1st price of $2.75 a share to June 30 price of $4.39. Therefore, although the company has authorization from the board of directors to execute a stock repurchase program under which Discovery Partners may acquire up to a million shares of common stock in the open market otherwise, we did not repurchase any share in the last three months. This concludes the first part of our conference call. I'm available to answer questions at this time, and we urge investors and analysts to ask any and all questions as we will not be responding to individual calls and questions regarding our positions, financial results or financial guidance from 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 speaker phone, 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 Sean McKenna with Merriman Curhan Ford. Please state your question.

Hi guys. Could you give us an idea of what the current backlog total is now?

For the full year, the current backlog is now between 45.1 if you measure contracts for which we've received work orders under up to $46.2 million if you include deals that we've signed but yet have not received work orders but which we might recognize revenues for for this year.

OK. Great. And then, just as a follow up, could you guys comments a little bit about what additional opportunities you might be seeing in Japan and other regions?

Well, as I said before, the Japanese market seems to be moving. There is always a good pipeline. If I actually look at a pipeline now of businesses in U.S., Europe and Japan is certainly bigger than it was and more realistic than it was, for instance, six months ago.

However, it's always very risky to put a number to it or a probability considering the market it still fairly fluid.

OK. Thanks.

The next question comes from Gene Manheimer with Roth Capital Partners. Please state your question.

Hi, guys. Nice quarter. I have a three-part question. First, for the quarter what percent of revenues derived from the Pfizer relationship?

OK. That was 65%.

OK. And are you able to disclose the breakout of revenues into milestone payments versus time and materials fees?

With respect to - that was in respect of Pfizer or in general?

In general.

For this quarter there was no significant milestone payment of any kind. So these are, sort of, regular normal revenue for compounds shipments, instrumentation or FDA work.

OK. Thanks Ricardo. And then finally, the Actelion collaboration, can you quantify with a range, perhaps, what you mean by a significant collaboration?

Historically, we have classified as significant collaboration as one that is a multi-million dollar collaboration. So it's - certainly it's in excess of a million dollars. I can tell you this collaboration is in that order of magnitude. I think I mentioned that in the last quarter.

OK. And then actually one more; are you - can you provide any visibility or guidance for fiscal '04 at this time?

Not yet but I would expect to do so probably in the next conference call give you some view of '04. is time is a bit too early on our normal process.

OK. Thanks very much guys.

Thanks, Gene.

Thank you.

Once again, ladies and gentlemen, if you do have a question please press star one on your puss button telephone at this time. Gentlemen, I'm showing no further questions at this time.

OK. Well, I just want to thank you for participating to this call and I look forward to talk to you again in the next quarter.

Ladies and gentlemen, this concludes our conference for today. Thank you all for participating and have a nice day. All parties may now disconnect.

Thank you.