Infinity Pharmaceuticals Inc (INFI) 2005 Q2 法說會逐字稿

Good day and welcome to today’s Discovery Partners International Q2 earnings conference. As a reminder, today’s conference is being recorded. For opening remarks and introductions, I will now turn the call over to Mr. 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 and I would like to welcome you to Discovery Partners’ Q2 2005 financial results conference call.

With me today are Craig Kussman, CFO, and Dr. Michael Venuti, CSO of Discovery Partners. In this call we plan to review the results of the quarter and the 6 months ended June 30,2 2005, review the Company’s offering in the market and provide guidance for the second half of 2005.

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 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 National Institute of Mental Health or NIH continue through and beyond our contractual terms; the mix and timing of revenues from sales of products and services; days in our backlog; our ability to establish and maintain collaborations; execute more profitable business; and realize operating efficiencies; and our ability to achieve expected results in 2005; the level of expenditures necessary to enable the Company to achieve its objective of focusing its business on providing lead drug candidates to pharmaceutical companies; our ability to successfully commercialize the micro ARCS technology; our ability to acquire complementary businesses or capabilities and the integration of acquired businesses and capabilities 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, 2004, as filed with the SEC and other SEC filings.

Backlog measures are not defined by GAAP and our measurements of backlog may vary from that used by others. While we believe that long-term backlog trends serve as a useful metric for assessing the growth prospects of our business, backlog is not a guarantee of future revenues and provides no information about the timing on which future revenues may be recorded. In addition, in response to Regulation G, we will no longer refer in our commentary or in answers to questions on past, current, or future results to non-GAAP financial measures and will only highlight the magnitude of any changes included in the various periods.

As those of you who are listening by webcast now, 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 SEC 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 Q2 ended June 30, 2005 were $11.4 million, 13%, below the Q2 of 2004 and 61% above Q1 of 2005. The increase versus Q1 was primary due to the increase in chemistry services revenues caused by increased shipments of compounds to Pfizer, which accounted for 60% of our revenues for this quarter.

The decrease versus prior year was caused by the lack of Crystal Farm product revenues and decreased screening services revenues, offset by an increase in chemistry services due to new revenues from the NIH contract, which offset lower revenues from Pfizer.

Gross margin as a percentage of revenue for Q2 of 2005 was 33%, down from 40% in Q2 of 2004 and up from 23% in Q1 of 2005. The increase in gross margin as a percentage of revenue versus Q1 resulted from higher Pfizer compound shipments.

The decrease in gross margin as a percentage of revenue versus last year resulted from lower volumes of screening services and instrumentation products and from a shift in the mix of chemistry services revenues to lower margin revenues.

R&D costs for Q2 of 2005 were $1.6 million, up from $0.9 million in Q2 of 2004 and up from $1.3 million in Q1 of 2005.

The increase in R&D costs versus both periods resulted from the addition of our natural products business and 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 targeted libraries, compound storage solutions, in silico tools, screening assays and drug discovery process development.

SG&A costs for Q2 of 2005 were $3.6 million, unchanged from Q2 of 2004 and down from the $4.1 million result in Q1 of 2005. The decrease in SG&A costs versus Q1 was primarily due to the absence of costs relating to the separation of the Company’s former COO.

The Company recorded no restructuring charge during Q2 of 2005, compared to a $0.1 million restructuring charge during Q1 of 2005 related to higher than expected facility remediation costs associated with the shutdown of our Tucson facility that we announced in 2003. There were no restructuring costs in 2004.

Amortization of stock-based compensation for Q2 of 2005 was $0.3 million, up from the $0.1 million result in Q2 of 2004 and up slightly from Q1 of 2005. The increase in amortization versus Q2 of 2004 was primarily due to additional restricted stock grants made during Q3 of 2004 and Q2 of 2005. The slight increase in amortization versus Q1 of 2005 is due to the initial stock grant made to the Company’s new CSO, which more than offset a natural decreasing rate of amortization.

The Company recorded no impairment charge in Q2 of 2005, compared to a $1.0 million impairment charge during Q1 of 2005 related to the partial writedown of our toxicology-based intangible assets, as the loss of a customer due to bankruptcy indicated the carrying value was not recoverable. There were no impairment charges in 2004.

The Company reported a $1.8 million loss from operations during Q2 of 2005, compared to an operating profit of $0.6 million in Q2 of 2004 and a $5.1 million loss from operations in Q1 of 2005.

The reduction in the loss in Q2 versus Q1 is primarily due to the improvement in gross margin caused by higher Pfizer compound shipments, the absence of the impairment and restructuring charges, and lower SG&A costs, which offset higher R&D costs.

The loss in the quarter versus the prior year results is primarily due to the reduction in gross margin driven by lower volumes, higher R&D costs and higher amortization of stock-based compensation.

Net loss for the quarter ended June 30, 2005 was $1.4 million or $0.05 per share, compared to net income of $0.7 million or $0.03 per share in Q2 of 2004 and a net loss of $4.5 million or $0.18 per share in Q1 of 2005.

Revenues for the 6 months ended June 30, 2005 were $18.4 million, 26% below the $24.8 million results in 2004. The decrease in year-over-year top line performance is primarily due to the absence of Crystal Farm product revenues and decreased chemistry and screening services revenues.

The decrease in chemistry services resulted from the exercise of 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 Q1 of 2005, which resulted in $4.2 million of revenue in Q4 of 2004 that was not recognized in Q1 of 2005. This more than offset new chemistry services revenues from the NIH contract. The decrease in screening services revenues was due to a lower level of screening activity.

Gross margin as a percentage of revenue for the first 6 months of 2005 was 29%, down from 42% in 2004. The year-over-year decrease in gross margin as a percentage of revenue resulted from lower volumes in all service and product categories, an increasing mix of lower margin revenues, and from the exercise of 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 Q1 of 2005. Which resulted in gross margin of $3.1 million in Q4 of 2004 that was not recognized in Q1 of 2005.

R&D costs for the first 6 months of 2005 were $2.9 million, up from $1.8 million in 2004. The year-over-year increase in R&D costs primarily relates to the addition of our natural product business and 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 our compound storage products, in silico tools, screening assays, and drug discovery process development.

SG&A costs for the first 6 months of 2005 were $7.7 million, up from $7.2 million in 2004, primarily due to costs relating to the separation of the Company’s former COO.

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

Amortization of stock-based compensation for the first 6 months of 2005 was $0.6 million, up from $0.3 million in 2004 due to additional restricted stock grants made during Q3 of 2004 and Q2 of 2005.

The Company recorded an impairment charge during the first half of 2005 related to the partial writedown of our toxicology-based intangible assets, as the loss of a customer due to bankruptcy indicated the carrying value was not recoverable. There were no impairment charges in 2004.

The Company reported a $6.9 million loss from operations during the first half of 2005, compared to an operating profit of $1.2 million in 2004. The loss in the first half of 2005 versus the prior year result is primarily due to the reduction in gross margin caused by lower volumes, higher R&D, SG&A and stock-based compensation costs and the impairment charge.

Net loss for the 6 months ended June 30, 2005 was $5.9 million or $0.23 per share, compared to net income of $1.8 million or $0.07 per share for the comparable period of 2004.

Cash and short-term investments at June 30, 2005 were $80 million, a decrease of $4.9 million from the balance at March 31, 2005 due primarily to the net loss, the acquisition of the assets of Biofrontera Discovery GmbH, other investments in capital equipment, and an increase in net working capital requirements.

Now let me ask Riccardo to review the operations for Q2 of 2005 and on the key milestones for the remainder of 2005.

Thank you, Craig.

Our financial performance in Q2, although significantly better than Q1 due to the new shipment to Pfizer, is still below our expectation as we continue our effort to refocus the Company towards larger, value-added collaborations and away from providing individual elements of our drug discovery capabilities as separate service offerings.

This is a significant shift in our offerings and is having a material impact on our short-term financial performance. I have therefore asked Dr. Michael Venuti, our CSO, to briefly highlight for you today our collaborative concept and capabilities to give you some idea of the type of collaboration we’re now seeking. Mike?

Thank you, Riccardo.

Over the past few years, we have deployed the technology platform built at Discovery Partners to carry out and successfully execute essentially every phase of the drug discovery process, from assay development on new biological targets through to lead compound optimization and selection for safety assessments.

We performed these activities under confidential service contracts for a multitude of clients, from the largest pharma companies to small biotechs. Our individual accomplishments and long-term success in this arena have in general not been marked by a string of public announcements, but rather they have been most importantly recognized through DPI’s growth and in 2003 and 2004 profitability.

However, we at DPI, both in science and management, well recognize that the market place for such one off fee-for-service contracts - and indeed the whole drug discovery world - has been irreversibly changed by the recent trend of R&D-based companies, large and small, to disperse outsourcing of basic discovery work.

From biology to chemistry, from assays to libraries and all the way to lead compounds, the ability to fracture a project into subcontracts and put each task out for bid has become more prevalent. So much so that the resulting downward pricing pressures have sent such work to very able but less highly compensated offshore sources.

But this very trend to fractured offshore outsourcing has, in my opinion, begun to create a new market, one that will put a high value on consolidation of such services with quality confidentiality and speed as hallmarks.

Mid-size and regional pharma companies and growing biotechs with successful breakthrough products are finding the need to invest their returns into new product areas and research. The financial constraints on such portfolio building activities are usually defined by a make-versus-buy decision, with fixed costs of the build being the main disincentive.

On the other side of the pricing bracket are the soaring costs of end licensing for up front fees and expenses until the first clinical go/no-go decision have essentially tripled on average over just the last 3 years. So portfolio enrichment has become an expensive and mission-critical issue for smaller companies as it has been with the largest all along.

Through recent discussions, we now sense that this provides DPI with a unique opportunity to offer the various platform technologies of the Company in multiyear, multi-target, integrated drug discovery collaborations.

During the quarter, we have substantially increased the number and level of discussions with several pharmaceutical companies aimed at entering into such multi-target, multiyear collaborations to provide them with a stream of preclinical candidates.

Whether the need is driven by entry into new therapeutic areas or by a requirement to access a basic research technology new to the drug company, DPI’s broad experience with families of targets emphasizing focused chemistry libraries and eventual lead optimization guided by in vitro PK ADME screens, satisfies those needs.

We believe we can construct such multi-target collaborations to address the current needs of such growing companies in a flexible and cost competitive way, obviating their need for fractured outsourcing. Such that the benefits of such a collaboration with DPI will show the tangible results of new lead molecules quickly. We continue to explore such opportunities with a number of companies and I hope to report progress in our efforts in integrated drug discovery partnerships in the near future.

Now I’ll turn the call back to Riccardo for his concluding remarks.

Thank you, Mike.

While we feel that the scientific talents we have assembled are our most important assets, without them our collaborative offerings would not be believable. For this reason, it is imperative to keep them ready to be deployed even if we do not currently have a sufficient level of customer revenue, genetic and projects for them to work on.

We are fully aware that this will result in a higher than previously anticipated loss for the year and that this situation can only be maintained for a short transitional period. But we are confident that we will soon be able to successfully conclude ongoing collaboration discussions. In any event, we are also fully prepared to implement appropriate action to reduce expenses by year-end should our expectation for new business not be fulfilled.

As we discuss at every quarterly conference call, Pfizer remains our most important customers and any development in our relationship or in their strategic direction is important to our future. During July, Pfizer announced a series of initiatives aimed at savings up to $4.0 billion over the next 3 years. In this environment, it is difficult to predict the level of business, if any, we will receive from this very important customer after the expiration of our current contract early in January 2006.

However, we have not received any indication from Pfizer that they intend to discontinue the use of collaboration with external suppliers as a tool to reduce their overall R&D cost structure and improve efficiency.

Our current 12-months backlog is just over $20 million, substantially lower than we reported last quarter due to the pending expiration of our Pfizer contract. Based on our current new business visibility, we now estimate revenues for the second half of 2005 at approximately the same levels as the first half, with a slightly higher loss due to the additional R&D expenses at the newly acquired natural product operation in Heidelberg, Germany.

This revenue amount does not include the revenue for the two Universal Store Systems to be deployed for the NIH project in 2005, as they will be recognized over the life of the NIH contract. And the loss does not include any potential restructuring charge that could be required depending on the future business outlook that evolves during this last half of 2005

We continue to estimate that our cash at the end of 2005 will be in excess of $75 million, absent any further M&A activity, restructuring activity or stock repurchase under our current authorization

This concludes the first part of our conference call. We are 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?

[Operator Instructions] We have a question from Phil Nadeau, SG Cowen & Co.

Good morning. Thanks for the update. My first question is on Pfizer. Riccardo, could you give us some idea of when you expect to have a better idea of how much business you’ll get from Pfizer next year?

It’s difficult to say. I would expect, within the next several weeks, we should be starting hearing something from Pfizer in terms of their future intentions and how to do it. We always have our discussion with Pfizer and several other collaborations, so it’s difficult to see when this one will come up for a discussion. But we’d expect, in the next several weeks, we should be getting something. I guess they are fairly busy during the present time in sorting out their restructuring and everybody has to find out what the next job is before they get to us.

Okay, great and the second question is on your guidance. Revenues in the second half of the year at the same level as revenues in the first half of the year would imply a sequential decrease versus this current quarter’s revenue run rate. Why is that? What is leading to the decrease in revenues in Q3 and Q4 versus Q2?

Go ahead, Craig.

The primary driver is a reduction in the Pfizer compound shipments as the current contract is winding down. So, in terms of our Pfizer volumes, Q3 will be lower than Q2 and Q4 would be even lower than Q3.

Okay, great. Thank you.

[David Malley] with [Madewell Capital Management.

Hi. Thanks for taking my call. in past calls you’ve always mentioned the possibility of acquisitions and that being one of the reasons for keeping such a larger cash balance. I haven’t heard you mention anything today. Is that still something that you’re considering?

We’re always considering acquisitions, but unfortunately, as you well know, until its done we can’t really mention too much and again, we have been looking at acquisitions. We have made one in the last quarter, which is the Biofrontera Discovery. It was a small acquisition and certainly not one to consume an awful lot of cash.

And we are always discussing with various potential companies that can increase our platform of technologies and possibly more of capabilities. So I did not mention anything because there is nothing that I can mention at the present time.

Right. Absent that, are there any other plans for the cash or do intend to continue to sit on such large balances?

I know the issue. Obviously we discuss with the board, at every board meeting, various use for the cash, including what some of our shareholders have been asking, which is repurchasing stock. Given the current situation and uncertainty in terms of potential restructuring charges or the uncertainty with the Pfizer future, we think it’s prudent at the present time to keep our cash and then making a decision once we have more visibility going forward.

Okay, thanks.

And Mr. Pigliucci, there are no further questions at this time. I’ll turn it back over to you for any additional or closing comments.

Well, I just would like to thank all of you for participating on this teleconference and I look forward to talking to you again soon and eventually giving you some news about our future collaborations.

Thank you very much.

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

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