Infinity Pharmaceuticals Inc (INFI) 2003 Q3 法說會逐字稿

Good morning, and welcome, ladies and gentlemen, to the Discovery Partners International third-quarter 2003 financial results conference call. At this time, I'd 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 turn the conference over to Mr. Ricardo 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' third-quarter 2003 financial results conference call. With me today are Craig Kussman, Chief Financial Officer of Discovery Partners, and Taylor Crouch, President and COO.

In this call, we plan to review the results of the quarter ended September 30, 2003, update the guidance for the fourth quarter of 2003, and give preliminary guidance for 2004. As you know, I'm obliged to remind you to consider the following Safe Harbor statements regarding forward-looking statements.

Statements in this conference call that are not strictly historical are forward-looking statements within the meaning of the Private Security Litigation Reform Act of 1995, and they involve a high degree of risk and uncertainty. The company's actual result may differ materially from those projected in the forward-looking statements due to risk and uncertainties that exist in the company's operation, 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 efficiency; our ability to achieve expected growth and earnings per share in 2003; and the integration of acquired business and trend toward consolidation of the pharmaceutical industry; quarterly sales variability; technological advances by competitors; and other risks and uncertainty more fully described in the company's annual report on Form 10-K for the year ending December 31st, 2002 as filed with the Securities and Exchange Commission and other SEC filings.

In addition, in response to Reg G (ph), we 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 will only highlight the magnitude of the change -- the charges included in the various periods.

As those of you who are listening by Webcast know, this conference call is publicly available by live webcast on our website at www.discoverypartners.com. This call is the property of Discovery Partners. A copy of the prepared remarks on this call as well as the earnings press release issued this morning have been furnished to the Securities and Exchange Commission on Form 8-K.

I will now turn the call over to Craig Kussman, Discovery Partners' CFO, to discuss our financial performance.

Thanks, Riccardo, and good morning. Revenues for the third-quarter ending September 30, 2003, were $11.4 million, 8 percent above the third-quarter 2002, due to increases end exclusive compound supply and high throughput screening revenues, which offset decreases in non-exclusive compound supply revenue.

Revenues for the third quarter were $0.2 million above the second quarter of 2003. Pfizer accounted for 66 percent of our revenues during the third quarter versus 64 percent in the second quarter.

Gross margin as a percentage of revenue for the third quarter of 2003 was 40 percent, up from 34 percent in the third quarter of 2002, and up from 36 percent in the second quarter of 2003. The improvement in gross margin is primarily due to higher screen volumes, higher exclusive chemistry compound production volumes, savings in materials costs, and other operating efficiencies. The higher chemistry compound production volumes, which were in excess of our delivery commitments, have now given us a buffer and hence greater visibility against future deliveries. However, our ability to sustain these higher volumes in the future will be contingent on winning new business.

Research and development costs for the third-quarter 2003 were $0.5 million, down from $1.3 million in the third quarter of 2002 and $0.1 million lower than the second-quarter of 2003. The decrease in research and development cost is due to the redeployment of development scientists and engineers to the direct revenue generating activities of customer-funded R&D programs and collaborations.

SG&A costs for the third quarter of 2003 were $3.4 million, down from $3.5 million in the third quarter of 2002 and unchanged versus the second quarter 2003. The decrease in SG&A costs versus prior year is primarily due to G&A cost containment actions and the absence of executive recruiting and relocation costs, which more than offset higher personnel cost.

Restructuring costs related to the closure of the company's Tucson facility were $0.3 million for the third quarter of 2003, which included moving, relocation and other costs. The company does not expect to incur any remaining restructuring costs related to the Tucson closure.

The company reported a $0.1 million profit from operations during the third quarter, including $0.3 million of restructuring costs due to the improvement in gross margin. This marks the first quarterly operating profit in the company's history.

Interest income was $0.4 million for the third quarter of 2003, a 15 percent decrease from last year due to declines in the U.S. interest rates and a marginal decrease in the average cash balance. Interest income was unchanged versus the second-quarter of 2003.

Net income for the third quarter ended September 30, 2003 was $0.5 million or 2 cents per share, which included $0.3 million or 1 cent per share of restructuring expense related to the closure of our Tucson chemistry operations. This compares to a reported net loss of $0.8 million or 3 cents per share in the third quarter of 2002.

For the nine months ended September 30, 2003, revenues were $35.4 million, up 22 percent from the $29 million results for the same period in 2002. The revenue growth was primarily due to increases in exclusive compound supply and high throughput screening revenues, which were partially offset by decreases in non-exclusive compound supply revenues.

For the nine months ended September 30, 2003, gross margin as a percentage of revenues was 34 percent, up from 9 percent for the same period in 2002, which included provisions related to the discontinuation of the company's non-exclusive compound supply business equaling 25 percent of revenue. The improvement in gross margin for the first nine months of 2003 was primarily due to the absence of provisions related to the discontinued product line. Higher screening volumes, higher exclusive chemistry compound production volumes, and lower materials costs associated with inventory cost management initiatives undertaken in 2003 offset decreases in instrumentation gross margins.

Research and development costs for the nine months ended September 30, 2003 were $1.9 million, down from $5.1 million in the same period in 2002. The decrease in research and development costs versus last year is due to the redeployment of development scientists and engineers to the direct revenue generating activities of customer-funded R&D programs and collaborations.

SG&A costs for the first nine months of 2003 were $9.9 million, up slightly from $9.8 million last year. Additions to personnel costs were offset by other cost containment actions.

As mentioned previously, restructuring costs related to the closure of the company's Tucson facility were $1.9 million in the first nine months of 2003. The company did not incur a similar expense in the same period of 2002.

Interest income for the nine months ended September 30, 2003, was $1.4 million, down slightly from $1.5 million last year due to declines in U.S. interest rates and our average cash balance, offset by realized gains on investments.

Net loss for the nine months ended September 30, 2003 was $0.4 million or 2 cents per share, which included $1.9 million or 8 cents per share of restructuring expense related to the closure of our Tucson chemistry operations, compared to a reported net loss of $11.2 million or 46 cents per share for the same period in 2002, which reflected $7.3 million or 30 cents per share of provisions related to the discontinuation of the company's non-exclusive compound supply business.

Cash and short-term investments at September 30 2003 were $70 million, down $0.8 million from our cash balance at June 30, 2003 primarily due to the timing of inventory working capital requirements, the repayment of $0.6 million of capital leases and restructuring payments of $0.6 million which were partially offset by the decrease in net fixed assets and net income.

Now let me ask Riccardo to review the operations for Q3, and the outlook for the remainder of 2003 and 2004.

Thank you, Craig. I'm very pleased to again report to all the current and potential investors a record quarter for Discovery Partners. We have achieved our expectation and a new milestone in our financial performance. In addition to delivering our highest reported EPS ever, for the first time in our company's history, we're pleased to report a profit from operation. We are very proud of this achievement, especially in a quarter that still included over $300,000 in restructuring charges for the closure of all of our Tucson operations.

We're also continuing to announce an impressive array of operational and business development accomplishments. On the operational side, during the quarter, we started to realize the benefits of our restructuring and increased operating efficiency at all of our facilities, but especially in South San Francisco and Brazil (ph). Also during the third quarter we increased the number of projects executed in India, and completed the relocation of equipment and management personnel from the U.S.

The increased efficiency of our operation has allowed us to schedule chemistry production ahead of some of our delivery commitment to create an inventory buffer and a more predictable shipment pattern for the future. This resulted in a slightly higher inventory level and in favorable gross margin balances for the quarter due to overabsorption of manufacturing capacity.

On the business development front, we announced at the beginning of the third quarter a major strategic alliance with Bruker AXS, a leading producer of x-ray crystallography systems, To market and distribute worldwide our Crystal Farm protein crystallization and imaging system. This is a major acknowledgment of the capability of our system, and allows Discovery Partners to take advantage of Bruker's significant global sales and marketing infrastructure. We expect to start shipments of units to Bruker during the fourth quarter.

On September 25th, we announced a licensing agreement with AstraZeneca under which AstraZeneca receives worldwide, non-exclusive rights to our patents in the field of in vitro gene expression profiling to predict toxicity of chemical compounds. This is particularly important development, as AstraZeneca was one of the companies originally opposing the issuance of our patent at the European patent office prior to the ruling in our favor earlier this year.

And finally, yesterday we announced a significant expansion of an existing collaboration with Inspire Pharmaceutical for the optimization of lead compound in the P2 receptor family that may be important across multiple therapeutic areas.

We are, of course, delighted every time one of our collaborators expands the relationship with Discovery Partners. This is the best evidence of the quality and value of our contribution to our partners through our discovery effort, and a tangible indicator of a sustainable business model.

For the past 12 months at every earnings conference call, we've communicated our concerns on the status of the biotechnology and pharmaceutical industry. We're now starting to see signs of renewed investment in most larger companies, and the funding outlook for some of biotechnology operation is also somewhat improved.

While it is too early to predict that the current market condition will bring a major influx of capital to this industry, we're cautiously becoming more optimistic in our fundamental outlook and short-term expectation. Primarily based on this sentiment, and on the strength of our shippable backlog, which is in excess of $12 million for the fourth quarter this year, we're comfortable in increasing our earnings estimate for the fourth quarter to 3 cents a share, which will bring the company to positive reported EPS for the year.

Although in the planning stages for our 2004 budgets, we can release preliminary guidance for next year. In 2004, we expect to continue to deliver a revenue growth rate in the mid teens and achieved EPS growth over this year's reported results by delivering EPS in the mid teens cents per share.

This concludes the second part of our conference call. I am available to answer questions at this time, and we urge investors and analysts to at 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. Operator?

Thank you, the question and answer session will begin at this time. (OPERATOR INSTRUCTIONS) I am showing no questions.

Obviously, the only way that I can get no questions on a conference call is to provide profit, so I will try to continue to do that. Thank you very much, and I'll talk to you next quarter.

Ladies and gentlemen, if you wish to access a replay for this call, you may do so by dialing 1-800-428-6051, or 973-709-2089, with an ID number of 308407.

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