Infinity Pharmaceuticals Inc (INFI) 2005 Q1 法說會逐字稿

Good morning, ladies and gentlemen, and welcome to the Discovery Partners International first quarter 2005 earnings conference call. As a reminder, today’s the call is being recorded. For opening remarks and introductions, I will now turn the call over to Riccardo Pigliucci, Chairman and CEO. Please go ahead, sir.

Thank you and good morning. I’m Riccardo Pigliucci, Chairman and CEO of Discovery Partners International. I would like to welcome you to Discovery Partner’s first quarter 2005 financial results conference call. With me today is Craig Kussman, CFO of Discovery Partners. In this call, we plan to review the results of the quarter ended March 31, 2005, and provide guidance for the remainder of 2005.

As you know, I am 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 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 operation, our research and development efforts and our business environment, including whether the Company's relationship with Pfizer and the NIH continues through and beyond the contractual terms; the mix and the timing of revenue from sales of products and services based on our backlog; our ability to establish and maintain collaboration, execute more profitable business and realize operating efficiency; our ability to achieve expected results in 2005; and the level of expenditure necessary to enable the Company to achieve its objective of focusing its business on providing lead drug candidates to pharmaceutical companies; and the ability to acquire complementary businesses or capabilities and the integration of acquired businesses and abilities; and the trend towards consolidation in 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 31st, 2004, as filed with the Securities and Exchange Commission, and other SEC filings.

Backlog measures are not defined by GAAP and our measurement of backlog may vary from that used by others. While we believe that long-term backlog trends serve as a usable metric for assessing the growth prospects for our business, backlog is not a guarantee of future revenues and provides no information about the timing on which future revenue may be recorded.

In addition, in response to Regulation G, we will no longer include in our commentary any answers to questions on past, current or future results to non-GAAP financial measures, but we will only highlight of any changes included in the various periods.

As those of you who are listening by Webcast, 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, are being furnished to the Security and Exchange Commission Form 10K.

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 ended March 31, 2005, were $7.1 million, 40 percent below the first quarter of 2004 and 50 percent below the fourth quarter of 2004. Decrease versus both periods was primarily due to the decrease in Chemistry Services revenues caused by lower Pfizer compound shipments, lower screening volumes and the fact that there were no Crystal Farm product shipments, offset by higher revenues from our NIH contract.

The decrease in Chemistry Services versus both periods was due to the fact that we exercised our right under our agreement with Pfizer to deliver additional compounds in 2004 in an amount equal to the number of compounds scheduled for delivery in the first quarter of 2005, which resulted in $4.2 million of revenue in the fourth quarter of 2004 that was not recognized in the first quarter of 2005. As a result of these decreased shipments, Pfizer accounted for 37 percent of our revenues for the quarter.

Gross margin, as a percentage of revenue for the first quarter of 2005, was 23 percent, down from the 45 and 42 percent results in the first and fourth quarters of 2004, respectively. The decrease in gross margin as a percentage of revenue versus both periods resulted from lower volumes in Chemistry and Screening services as well as instrumentation products. The exercise of our right under our agreement with Pfizer to deliver additional compounds in 2004, an amount equal to the number of compounds scheduled for delivery in the first quarter of 2005, resulted in gross margin of $3.1 million in the fourth quarter of 2004 that was not recognized in the first quarter of 2005.

Research and Development costs for the first quarter of 2005 were $1.3 million, up from $.9 million in the first quarter of 2004 and up slightly from $1.2 million in the fourth quarter of 2004. The increase in Research and Development costs versus both periods resulted from the redeployment of development, scientists and engineers from direct revenue-generating activities of customer-funded R&D programs and collaborations to internal programs focused on Crystal Farm product, compound storage solutions, in Sillico tools and assays and drug discovery process development.

SG&A costs for the first quarter of 2005 were $4.1 million, up from the $3.6 million and $3.2 million results in the first and fourth quarters of 2004, respectively. The increase in SG&A costs versus both periods was primarily due to the separation of the Company’s former Chief Operating Officer and higher business development costs, offset by lower incentive compensation accruals.

The Company recorded a $0.1 million restructuring charge during the first quarter of 2005, due to higher than expected facility remediation costs related to the shut-down of our Tucson facility that we announced in 2003. There were no restructuring costs in 2004.

Amortization of stock-based compensation for the first quarter of 2005 was $0.3 million, up from the $0.2 million result in the first quarter of 2004 and down from the $0.4 million result in the fourth quarter of 2004. The increase in amortization versus the first quarter of 2004 was due to additional restricted stock grants made during the third quarter of 2004. The decrease in amortization versus the fourth quarter of 2004 relates to the impact of the departure of the Company’s former Chief Operating Officer and a natural decreasing rate of amortization.

The Company recorded a $1 million impairment charge during the first quarter of 2005 related to the partial write-down of our toxicology-based intangible assets as the loss of a customer, due to bankruptcy, indicated that the carrying value was not recoverable. There were no impairment charges in 2004.

The Company reported a $5.1 million loss from Operations during the first quarter of 2005, compared to operating profits of $0.6 million and $1.1 million in the first and fourth quarters of 2004, respectively. The loss in the first quarter versus prior year results is primarily due to the reduction in gross margin caused by lower volumes, the impairment charge and higher SG&A costs.

Interest income was $0.5 million for the first quarter of 2005, up $0.1 million from both the first and fourth quarters of 2004, due to higher yields on our investment portfolio.

Foreign exchange impact was a gain of about $50,000 for the first quarter of 2005, compared to losses of $50,000 and $0.2 million in the first and fourth quarters of 2004, respectively. The loss in the fourth quarter of 2004 resulted from the completion of two significant contracts performed by our Swiss-based subsidiary that were denominated in U.S. dollars.

Net loss for the first quarter ended March 31, 2005 was $4.5 million, or 18 cents per share, compared to a net income of $1.1 million, or 4 cents per share, in the first quarter of 2004, and net income of $1.4 million, or 5 cents per share, in the fourth quarter of 2004.

Now, let me ask Riccardo to review the operations for the first quarter of 2005. Riccardo.

Thank you, Craig. Our first quarter results are disappointing and not in line with our philosophy of running the Company with profitable operations and, highlights, more than anything, our dependence on our relationship with Pfizer.

During the quarter we took two significant steps to address our dependence on Pfizer and to more effectively execute the Company’s strategy of partnering our drug discovery capabilities and value-added offerings. On March 1st, we announced that we had entered into a binding Letter of Intent to acquire Biofrontera Discovery GmbH, a natural product-based, drug discovery company located in Heidelberg, Germany. We successfully closed this transaction on April 22nd.

On April 6th, we announced that Dr. Michael Venuti was our Chief Scientific Officer. Dr. Venuti has been a Board member of DPI since 2003 and has a distinguished career in the drug discovery arena at companies like Syntex, Genentech, Axys and, most recently, Celera Genomics.

Let me spend a few minutes highlighting the importance of this event to DPI’s long-term success. Our scientific capabilities in drug discovery, now spanning medicinal and computational chemistry, diversity and natural product liabilities for (inaudible) screening, in vitro biology for screening and secondary assays, molecular pharmacology for mechanistic proof of concept and BKME, screens for Litt (ph) organization in candidate selection.

In the past, we have each been applied to various partnerships with biotech and pharma companies. We believe we have now build both the infrastructure and the critical mass to offer our drug discovery capability in broad target to lead partnerships, encompassing multiple individual projects unbiased by target class, chemical class or therapeutic area. Such partnerships can flexibly package our technology platform and skills to produce well-qualified high-value drug candidates, (unintelligible) screening hits. Increasingly, pharma companies are turning to licensing to replenish their portfolios which are in constant need of both primary drug candidates and backups as the inevitable figure occur.

We will structure our partnership to be competitive in quality and superior in speed and cost to our customer’s alternative of internal owning licensing activity, to create the supplementary candidate pipeline. We have already initiated a conversation with some of our current pharma and biotech partners to gauge their appetite for such broad relationships. We’ll begin to meet with new potential partners in the upcoming weeks.

We feel this is the next logical step in the growth of DPI and, as I mentioned last quarter, it will require some investment this year to absorb the burn rate of the Biofrontera Discovery acquisition.

As stated in our last conference call, in addition to concentrating on expanding the Company through organic growth or acquisitions that complimented technology platforms, such as Biofrontera Discovery GmbH, we are activity pursuing the acquisition of companies with recurring revenues and profits that can compliment our offering, absorb part of our infrastructure and leverage our capabilities.

At this time, we do not have any better visibility than two months ago on changes in the business climate, nor on Pfizer’s intention after the end of our current contract. Our current 12 months backlog of $31 million is approximately $2 million lower than reported at year-end due to the expiration of our Pfizer contract at the end of this year. Based on this level of new business visibility and excluding any further transaction, we now estimate that the 2005 revenue will be between $42 and $48 million. This revenue amount does not include the revenues for the two universal store system to be deployed to the NIH project in 2005, as it will recognized over the life of the NIH contract, nor any significant contribution from Biofrontera Discovery acquisition.

As previously mentioned, during 2005, we expect to invest an amount in excess of our 2004 earnings of $4 million to more effectively execute the Company’s strategy and to absorb the current burn rate of Biofrontera Discovery. As a result, our current earning estimates for 2005 are reflecting the lower revenue volume, the higher (unintelligible), the Biofrontera Discovery acquisition and the impairment charge taken this quarter is a net loss of between $6 and $9 million, absence any other M&A transaction or restructuring activity that could be considered in the absence of any upturn in the business. We estimate that cash at the end of 2005 will be between $75 and $78 million, inclusive of the Biofrontera acquisition, but absence of any further M&A, restructuring activities or stock repurchases under our current authorization.

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 acquisitions, financial results or financial guidance following the conclusion of this conference call. Operator.

Our question and answer session will be done electronically. (OPERATOR INSTRUCTIONS) We’ll take our first questions from Phil Nadeau with S.G. Cowen.

Good morning and thanks for taking my question. Riccardo, first, on the Pfizer contract, you said that you don’t have any additional visibility at this time as to what the nature of the relationship will be after the contract is over, do you know when you will begin discussions with Pfizer or when you might be able to get visibility on what their level of business will be in 2006?

We continue to (unintelligible) on a daily basis on the scientific side. Regarding the contract, I would have expected to start, more or less, in the middle of the summer, third quarter kind of timing. I’ve been monitoring everybody else that is also having similar contracts with Pfizer and we’re all pretty much in the same boat, everybody expects something from Pfizer somewhere in Q3 or thereabouts in 2004 in terms of adding some more visibility. In theory, they’re supposed to give us timing three months before the expiration of the contract in terms of negotiations for the future. That’s what I expect, late summer.

Second, in the past you’ve talked about your pipeline for additional large-scale collaborations, what does that pipeline look like currently?

I haven’t seen an awful lot of changes. In other words, we have not lost any major deals and, on the other hand, they always seem to be about the same distance away from being concluded. What I’m seeing is a fairly slow decision in timing and everything else, even getting in small trial deals in expectation for bigger deals, so I cannot say that I’ve lost any of the deals that were in the pipeline, only that they are fairly slow to come.

Okay. Is Michael in the room to answer questions?

Unfortunately not. He’s probably listening to you in Switzerland at the moment.

That’s great. Those are my two questions for now. Thank you.

Your next question comes from Mike Mitchell with Kellogg Capital.

Just one question, if you assume that the Pfizer contract does go away, isn’t renewed, what does the cash burn look like at that point? I assume revenues are down by, roughly, half, but how many expenses are tied into that contract, so what would the burn be?

In the absence of any type of restructuring actions, if we assume the Pfizer contract completely went away, you would probably see the net loss that we projected, probably, double. That’s with zero Pfizer revenues in 2006. That’s a rough order of magnitude. Obviously, if that happened, we would be, most likely, undertaking certain restructuring actions.

I would add to that, I cannot give you any certainty of any Pfizer business, I will say the range of zero is pretty pessimistic.

Okay. Great. That’s all I have. Thank you very much.

Your next question is a follow-up from Phil Nadeau with S. G. Cowen.

Just one question, it does seem like your business model is changing, going towards these deeper relationships with clients, you’ve said you’ve met with some of the clients and I’m just interested to head the feedback from those clients. How competitive is that new space and have the clients been receptive to the possibility of signing such agreements?

I will say, rather than changing the business model, it is evolving. We have spent some time in sort of building the infrastructure, building the capabilities, keep adding capabilities over the last few years both internally and, most recently, our acquisition and, finally, topping it all with the hiring of a scientific officer that can put it all together and present it to our customers. So far, their reception has been fairly good. In reality, we have some limited relationships in the same mode, like with Allergan and so on, and will be committed to expand this relationship to multiple targets, multiple leads, serious and longer term relationships. That’s why Michael Venuti is, at the present time, touring Europe and visiting some of our key customers there.

What niche, in particular, do you think that you fill or what hole in the market have you identified?

Particularly, the ability to provide to a large customer the backup leads for their internal programs. In other words, people that already have a general program and will be running it and looking for additional capacity or additional capability to mirror what they are doing internally. That’s, specifically, one of the areas that we find very viable. Another one, which is like a different model in terms of financial makeup, is working with some biotech company that does not have the medicinal chemistry capability internally, they’re very much focused on the target and, then, focused on the clinical side and they’re missing the piece in between, which is where we’re going from the target to the lead serious and they can work with us rather than building an internal chemistry infrastructure.

Okay. Thank you.

We have a follow-up from Mike Mitchell with Kellogg Capital.

When you said that losing the entire Pfizer contract was fairly pessimistic, I guess, that the implication is that some portion - - it’s much more likely that some portion of that contract can be renewed or a new contract, maybe not in the size, could possibly come into place? Can you just go a little deeper into that?

Sure. If you recall, about a year ago, actually in February of last year, we renegotiated a contract with Pfizer that, initially, was only to provide Pfizer with what we call a “File Enrichment Compounds” and do that with us. Basically, that contract to provide the basic library for their major corporate level of compounds. They changed the contract at that time to have a portion of the money diverted to what it called “HF Programs” or Hit Follow-Up, which means that, not only is this creating a library of compounds, but creating a library of compounds after the screening has been at Pfizer and after they’re obtained some positive results and some compounds. So, very quickly, in a matter of weeks, they expect some compounds which are analogs or the compounds that they found that are positive, in order to create for this goal the structure activity relationship to understand a particular compound and what is around it, whether or not it is potent and what is the positive and so on.

This program, therefore, just isn’t in the drug discovery process of Pfizer. It’s not just that part of the process is the replenishing for (inaudible), therefore, we expect that even if they decided to cut back substantially into their investment in assets for the major corporate screening, they would have to continue in some way, shape or form into providing follow-up capabilities for their on-going drug discovery. That would be my expectation on the downside. Clearly, knowing what is going on at Pfizer at the present time in terms of overall restructuring and cut back of resources, if they cut major programs in R&D then, obviously, that would affect us as well. But, as I said, I would look at that one as a really lower probability.

If they just went - - this is a really bare bones scenario in some shape or form - - is there any range that you feel comfortable with that Pfizer could stick to on the bottom, I mean, it’s, obviously, higher than zero and lower than 100, but is there any tighter window to that?

I wish I could tell you, but I’d rather not at this time say anything because I’d like to be able to talk to Pfizer more in depth before I can release any of these numbers. Obviously, I have a gut feeling internally, but I don’t think I’m ready to share it at the present.

And you mentioned that you think it will be, maybe, the third quarter when - -

I would expect so. I would expect at third quarter. We’ve had a relationship for a long time with Pfizer. The contract calls for an end of the third quarter renewal or renegotiation and, therefore, that’s when I would expect things to be happening.

That’s all I had. Thank you very much.

Your next question is from Matt Schultz with Maple Hill Capital Management.

Thanks for taking the call. I guess it’s the obligatory cash question. I’m certainly aware that you’re actively pursuing acquisitions and that there will be some cash burn this year, but with the stack under three under tangible book, have you considered, perhaps, doing substantial share buy-back?

We are aware that some of our shareholders would like us to buy back shares. We are discussing this issue. We have an authorization open to buy share below, I believe, 3.50 a share. I think that’s our current authorization. We intend to have a discussion of that at our upcoming Board meeting in the next week or so as to whether or not we will exercise our ability to buy in the market or we want to keep our cash in view of either acquisitions or other restructuring activities.

Okay. So your inclination is to keep all the cash, even if the stock stays below $3.00 a share?

I would just say that we will be discussing this issue at the Board meeting and I would not say that I am inclined one way or the other.

Okay. Thanks very much.

There are no further questions at this time. I’ll turn it back over to our speaker’s for any additional closing comments.

I’d just like to thank all of you for participating in this conference call and I look forward to talking to you again in the next quarter. Thank you very much.

That does conclude today’s conference call and we thank you for your participation. You may disconnect your phones at this time.