Insmed Inc (INSM) 2002 Q4 法說會逐字稿

Good morning, and welcome ladies and gentlemen, to Insmed Incorporated's fourth quarter and year-end conference call. At this time, I'd 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 Baxter Phillips (ph), director of investor relations. Please go ahead, Baxter

Thank you, Chris.

Good morning, ladies and gentlemen. Welcome to today's investor earnings call. I'd like to read the Safe Harbor statement now. This call may contain forward-looking statements which has uncertainties which may cause our actual result, performance, achievements or industry results to be materially different from any future results or achievement, expressed or implied by these forward-looking statements, including those declined in the Securities and Exchange Commission filings.

It is now my pleasure to turn the call over to chairman and chief executive officer, Dr. Geoffrey Allan.

Thank you. Good morning, everybody.

As Baxter said, the call is to present our end of 2002 results, and provide an overview of our programs moving forward. So I'm going to pass over right now to Kevin Tully, our principal financial officer, and Kevin will take you through these results. And then I will get back on the line and take you through the background to our programs and what we are hoping to achieve in the year 2003 with these programs. And I hope that what you will gain from this morning's call is the demonstration of a very tightly focused organization moving forward and we have a great opportunity to show some meaningful advance in our product development programs.

So with that being said, let me pass now over to Kevin.

Thank you, Geoff. Good morning, ladies and gentlemen. Certainly a pleasure again to join this morning on another one of our quarterly conference calls. As usual, I will be leading with the financials.

I will be giving you a brief overview of both the 12 months and fourth quarter ending December 31, 2002, and comparing the results with the corresponding periods for 2001. I'll also be providing some guidance for 2003.

Firstly, looking back to 2002, for the 12 months ending December 31, 2002, our net operating losses were $36.4 million or $1.10 per share as compared with losses of 37.2 million dollars or $1.13 per share for the same period in 2001. As for the fourth quarter 2002, our reported net operating loss was # 18.5 million or 56 cents per share and this compares with 9.9 million and 30 cents per share for the equivalent period in 2001.

In looking at the full year comparison of 2002 with 2001, the improvements in our net loss of 9.8 (ph) million tended to net out several significant items which basically came close to offsetting each other. On the plus side we saw some 21.1 million improvements due to the lower expenses and accelerated revenue recognition, and these were partially offset by increases totaling 20.3 million as a result of charges relating to goodwill write off, restructuring provisions and low interest income.

To explain the pluses, in the operational areas, expenses declined by 17.5 million, due to the refocus on SomatoKine as our main drug candidate. We also were successful in again reducing the general and administrative costs year on year, yielding across the board savings of 1.9 million. Finally, we recognized 1.7 million of previously deferred revenues from Tieshal (ph) Pharmaceuticals as a result of the contract termination reported in Quarter 3 2002. As for the offset, the 15.4 million write off of goodwill in quarter four arose as the currying value of goodwill on our balance sheet could not be supported by the current fair value as determined by applying generally accepted accounting principals.

Basically, as our company stock is trading at a level which does not reflect the value of goodwill, the asset was deemed impaired and the entire amount of this non-cash item was required to be written off. The 2.5 million restructuring charge occurred in Q3 as a result of the announcement in September to discontinue the development of INF-1. And the reduced interest income resulted from lower interest rates, and a declining average cash balance.

As for the fourth quarter comparison, the key elements were again the goodwill write off, reduced operational expenses due to the refocus on SomatoKine and * continued G&A savings. Turning to cash, our cash and cash equivalents balance as of December 31, 2002, was 27.3 million. An improvement of close to 1.5 million from the forecast I indicated during our third quarter conference call. In terms of cash burn, this translates into an average monthly burn rate of 1.3 million for the final quarter. A drop of some 1 million per month from the average rate experienced for the first nine months of 2002.

Looking ahead to 2003, we begin the year on solid bottom. Our rapid restructure of the business and intense focus on ownership and accountability has allowed us to expedite our key programs and optimize our cash. In fact, we're starting the year with a cash position which is already ahead of expectations. I noted at the conference call which I expected our average monthly burn rate of 2003 should be in the region of 1.2 million per month. My current projections indicate we can beat that -- I believe we will be closer to a 1 million per month average burn rate for the coming year and fully 75% of that monthly burn will be directed towards the execution of our key value-added programs, principally surrounding GHIS and diabetes. As for the balance that would be directed on an as-needed basis to cover the necessary costs of running the public company and underpinning the business in a time where the costs of compliance are becoming more and more burdensome.

In essence, we believe we will accomplish more and spend less. We are to meet or beat the targets outlined during the conference call and drive the value of this company forward with positive data. We have defined margins to realize the value, we have the people to deliver the programs, and we have the cash to get us to an approved product. This concludes my summary. I'll certainly be available at the end of the call for questions.

And now I'll hand back to Geoff to talk in more detail about the coming year.

Okay. Thank you, Kevin.

I think one of the key messages Kevin laid out for you there is we have a very focused program moving forward. We're going to have our burn rate at $1 million a month, and really only one end gain in sight and this is to get SomatoKine approved. We think it has a huge commercial opportunity. So what I want to do right now is spend a few moments, I recognize that we'll have new investors on this call. And hopefully we'll have some old investors on the call, and therefore I want to spend a few moments just talking through what the product opportunities are and premises on which we work.

Let me first talk about SomatoKine. That is Insmed proprietary delivery system of IGF-1. IGF-1 is a novel therapeutic protein that is manufactured using recombinant technology. It a combination of insulin-like growth factor, which we refer to as IGF-1, and a second protein, BP-3 which serves the purpose of protective and regulating the activity of IGF-1 in our blood stream. It is very well established that IGF-1 is vital to our normal human existence. It circulates in our blood stream from embryonic development throughout our life span and plays a critical role in maintaining our normal healthy growth. There's considerable evidence that a lower than normal concentration of IGF-1 circulates in the blood stream results in an abnormal metabolism and defective growth and tissue repair. We believe IGF-1 deficiency contributes to many aspects of disease. Therefore, we see SomatoKine simply as a replacement therapy analogous to the way insulin and growth hormone have been used for several years.

The secret to success for any replacement therapy is to ensure that it is delivered to the body mimicking as closely as possible the way it normally exists in the body. And we believe that SomatoKine addresses this issue by delivering IGF-1 bound to its natural protective protein BP-3. Now, I have mentioned insulin and growth hormone. These are two very well established replacement therapies, both of which enjoy billion dollar markets in today's marketplace. Insulin growth hormone function in the human body work intimately in concert with IGF-1. In fact, IGF-1 mediates the majority of the growth actions of growth hormone. Therefore, we believe it is now time to recognize IGF-1 as a valuable replacement therapy, obtain regulatory approval for it and build similar commercial markets to those enjoyed today by insulin and growth hormone.

As I said, growth and metabolism are the two fundamental biological processes regulated by IGF-1 and therefore our critical strategy is to focus on approval for growth disorders and disorders of metabolism, mainly diabetes. We are currently pursuing the approval of SomatoKine in growth hormone sensitivity syndrome. This is where the growing body does not respond properly to growth hormone because it is not able to generate the production of an appropriate amount of IGF-1 to stimulate growth. In its most severe form, Laron's (ph) syndrome, children remain as dwarves throughout their entire life. There is no therapy available for these children. This is a limited population of children. But we have received a designation by the FDA to support our development efforts, and we believe that this indication represents the most expeditious program to get SomatoKine approved. It is very important to recognize that this commercial opportunity is near term, and the approval of this product is key because it will allow the company to expand the usage of the product into additional indications.

The full market opportunity for SomatoKine encompasses several disease conditions where this is clear evidence that IGF deficiency contributes to the cause of the disease. So as I said earlier, when I used the analogy of insulin and growth hormone, we could achieve a billion dollar opportunity with this product. Therefore, near term approval is the only thing on our minds right now.

Let me talk about a few of the clinical milestones. I think I announced at our last call we have completed our initial safety study in children with GHIF and we have identified our doses for our upcoming pivotal trial. We have submitted the results of this study to the Endocrine Society, at the national meeting in June. We told you in the previous call we'd initiate a pivotal study in the indication and we are pleased to inform you that this trial is on track to begin in the first half of this year. Let me remind you once again that this trial will form the basis of our regulatory application, our new drug applications for both the European authorities and the USFDA. And we hope to submit this application by the second half of 2004. We will be planning to conduct an interim analysis and this may allow us the opportunity to file earlier.

We also announced to you last year that we had licensed from Pharmacia various regulatory doses that supported the approval of their IGF in several European countries and we continue to believe as we move down the path of regulatory approval for SomatoKine, the ownership will prove to be invaluable in facilitating the ultimate approval of SomatoKine.

Now, let me turn to diabetes. There are still some very disturbing issues in diabetes management today in this country. For example, this disease is still widely underdiagnosed and is achieving epidemic proportions in our population. Furthermore there's a continuing need for new and approved therapies to manage this disease and thereby prevent the devastating consequences of long-term elevated blood sugar. There are well over three million patients taking insulin therapy today in this country and yet the American Diabetes Association continue continues to report that our diabetic population is not achieving the target blood sugar level for a healthy condition.

This simply means one thing --we need new therapies that can be administered alongside insulin to achieve adequate glucose control. And we believe SomatoKine is a very valuable product in providing this function. I think as you know at Insmed we have generated a considerable body of evidence, demonstrating the ability of SomatoKine to approve the effectiveness of insulin and blood glucose levels in diabetic subjects. We reported three phase II studies demonstrating this effect. In our last conference call, we briefly discussed that we have an ongoing type I diabetes study at the University of Cambridge in the United Kingdom. And I'm pleased to remind you that we did report on the results of this study last week. This study was conducted in adolescent subjects with type I diabetes. This is a very difficult population of subjects to treat. And we have submitted the data for presentation to the American Diabetes Association this year. And we'll explain the data in more detail at that time of if conference.

So our next series of subjects of diabetes are still on track to begin in first half of this year as well. And at the completion of these studies which we believe will be at the end of 2003, we will have generated a very comprehensive study that the value of SomatoKine in diabetes management today and we'll be pleased to seek partnerships to advance the product to phase III and ultimately marketing and approval.

Now, let me turn to our initiatives with the product that we call BP-3. BP-3 is also a protein that is normally found in our blood stream. Remember I explained earlier that is the natural protective protein that binds IGF-1 in our blood stream. The target indication that we are pursuing in the BP-3 is oncology. It is well substantiated, several studies have demonstrated that cancer risk is inversely related to the circulating concentration of BP-3. Again, this is a common feel. In this case, a deficiency in the level of BP-3 in our blood stream may be a cause of increased risk of cancer, a very analogous situation to how we study IGF-1. We stated in the last conference call that we would have concluded several studies and report on the studies, and we did.

In early January, we demonstrated and reported convincing evidence that if you administered to BP-3 to tissues in animals you can reduce the size of their lymphatic tumor. We have presented this to the American Society for Cancer Research and the American Society for Clinical Oncology, and we are pleased to announce that it's been accepted for presentation at the forthcoming national meeting in the spring time. I think there's -- this basically demonstrates that our program is very focused in moving forward as rapidly as possible. Our next plan is to submit to IND for this product and to position a clinical evaluation in the second half of this year. We believe this product is an excellent partner in opportunity and bringing it to an IND package and positioning it for clinical studies would represent a very significant value stage for the product.

Now, with recombinant proteins, manufacturing is always a concern and I'm pleased to announce that our joint development is moving forward in a steadily successful pace. We have proven the initial scale and with our patented manufacturing process we have a cost effective production method which currently provided us with the drug product for our clinical trials. We will continue to scale up in partnership with the manufacturing process to maximize the economies of scale.

And now let me talk before I summarize our activities with corporate partners. We are now very actively, but very selectivity seeking our strategic partners for the compounds that we have in development. I think as everybody recognizes, partnering offsets much of the financial burden of running clinical trials across our various therapeutic areas. But even more important than that, it allows us to gain access to best in class strategic partners that can leverage these development products in the market areas that fall outside our core competence. And therefore, moreover, together with partners, we can gape much more effective market access to the compounds we have in development.

With SomatoKine, we are fortunate to have the kind of product of substantial efficacy across numerous areas, and therefore this provides us the opportunity to be open and flexible in our discussions with potential -- with potential partners. We do indeed intend on leveraging these assets in a way that provides a lot more financial flexibility in the future so that we can focus on the development that we can do and that we do well in our core areas.

So let me summarize. We will initiate a pivotal trial in GHIS in first half of this year. We will have a six-month interim analysis, which will be in early 2004. At which point we will decide whether or not to file an early MDA. We will complete the study by midyear 2004, and ultimately file the MDA at that time. It is important to note that we do have often drug designation for this indication in the United States. We have submitted the application to the European regulatory authorities, and we hope to hear back from them very shortly. We are very pleased to have the support of key opinion leaders in this field working on our team. And with their support, this program has run smoothly and efficiently and we believe that when SomatoKine reaches the market, they will be invaluable to the introduction of this medicine to the patients that require it.

With our diabetes initiatives, we will initiate additional study by the end of the first half of the year. These studies will be completed in the second half of the year, and we hope that it will be provided -- with sorry, we hope that these studies will provide the necessary information or a very comprehensive package of information that will stimulate corporate partner interest. With BP-3 we will file the IND in the second half of this year, and we hope to be able to finalize a partnership for that product some time this year.

So I think we presented to you very exciting pipeline, with a clear and concise time line to an MDA filing. We will continue the internal development of this pipeline, SomatoKine in the indications of growth disorders and diabetes, where we believe the biggest opportunities lie. As Kevin has presented to you, we have a burn rate that is extremely tightly controlled and can fund the activities that I've outlined to you. I believe we are in an enviable position in the biotech arena today. We have efficacious drug products that we believe we can get to the market in less than two years' time. We have well over two years in cash remaining and we have the internal capabilities to execute the plan that we have laid out to you today. So that summarizes my presentation.

Kevin and myself are both here available for questions. And therefore, I would turn it back to the moderator to solicit questions. Thank you and good morning.

Thank you, Dr. Allan.

The question and answer session will begin at this time. If you're using a speakerphone, please pick up a 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 that it is received. Please stand by for your first question.

Our first question comes from Kevin McKenna (ph) from RBC Dain Rauscher (ph).

Hi, Geoff and Kevin. The question is, could you give us a calendar of all the presentations that you've been accepted for as well as the presentations that you've applied for at the different conferences this year?

Yes. Well, first of all, good morning, Kevin. Nice to see that you are still a continued shareholder. Happy new year.

Thank you.

Okay. Let's see.

What I announced to you was that we have the diabetes presentation going into the American Diabetes Association and that will be presented by Dr. Dunker (ph) at the University of Cambridge, and this meeting will be in this June of this year. We have two presentations going into the Endocrine Society. One of which will deal with our GHIS indication. The very first safety study that we conducted, and that was conducted by Professor Martin Savitch (ph) in London, and again that meeting will be in June of this year. We then have the data that we presented with BP-3. As I said that goes for clinical oncology society meetings, and I believe those are in May -- in April of this year, and they have now been accepted for publication. And I believe that covers the various presentations. Yes, sorry, April and May for the various clinical oncology. Does that cover everything?

Yes. Thank you.

Thank you.

Thank you.

Our next question comes from Steve Seagal (ph) from Janney (ph). Please state your question.

Already -- already answered. It was the last one. I wanted the dates. I'm all set. Thanks.

Thank you. Just a reminder, ladies and gentlemen if you have a question, please press star one on your push button telephone at this time. Thank you.

Our next question comes again from Steve Seagal.

Since there doesn't seem to be any other questions, you say that you have over two years' cash. I'm wondering how difficult it's going to be to partner up if you're little bit behind schedule and you're down to very low dollars. I imagine that when you said you're going to burn about maybe 1.2 million per month in 2003, my first quick in between question is, that includes paying for all the trials and any of the drug costs and such?

Yeah. I think what Kevin has identified for you covers the cost to execute the R&D programs that I identified for you.

Yeah. It covers the cost of manufacture as well as the cost of clinical trials. On a full cost basis.

Okay. My second question is -- or my main question, if I'm able to come back is what happens if we're a little behind dead, you're towards the end of 2004 and you're down to maybe a couple million just in the bank? How difficult is it going to be to partner up with somebody because they may think that they have a lot of leverage as you guys don't have too much more room to go.

Well, I think that's always a potential problem and I think the only way I can answer that question is we'll cross that bridge at the time. We've outlined to you today a very focused program. I think we have a team of people that are very focused on getting this product approved. And I think we kind of come into this company every day and look at each other and make sure there's no slippage. Now, I can't guarantee there won't be any slippage, but we'll desperately try hard to make sure that we make the milestone with the money that we have on hand. And I can only say that if something goes wrong, we'll deal with it at that time.

Okay. My last question, I'm not sure how minor, but as a small cap investor I look at your stock and say, hey, 40, 50 cents like buying an option and I have a little more than three or six months left, I probably have two years, and I've got a lot of leverage and a guy who hates to see dilution, I personally would rather see you guys start to take some restricted stock and maybe cut back the salaries a little bit, which may give you more room for two years down the market, because the market seems to be real tight on raising money and in seeing partnerships with the bigger drug companies to put some money in to maybe give you some more breathing room.

Maybe you guys want to take some more stock and this is coming from a guy who would hate to see corporate officers getting stock down at 50 cents and just diluting me. I'd actually see it. Just wanted to let you guys know a little bit of market research. Thank you.

You wanted me to answer that question?

Sure.

Well, I can answer it in a number of different ways. I think as Kevin laid out for you, we're spending 75% of our money, focusing on the R&D programs. If you do a quick calculation, you'll find that we're not spending a great deal on salaries. If you then contemplate cutting back these salaries, the key people that we have in this organization motivated to do this job, you won't save a great deal of money. And that money won't extend the livelihood of the company. And into cut somebody's salary, this is a personal opinion, I think to cut somebody's salary when you're trying to get everybody in here at the crack of dawn to develop these products and execute this program, and build this value in this company, I think is a very poor view. Now, let me talk about the options. By the way, I just want to point out here, I'm not being defensive. I'm just talking the way I usually talk.

No that's fine.

Let me finish the second point about the options.

Okay.

You know, we -- with all the corporate governance issues that go on today, we look very carefully at stock options, we look at carefully at restricted stock, et cetera, et cetera. And I think I could safely say that if you looked at our stock option plan and how we remunerate our executives, we are certainly not out of line. And I do not believe that if we dole out any additional options this year we will create any dilution whatsoever in this stock. Well, we'll not create any significant dilution in this stock. So, that's my point of view.

Okay. Let me give you one minor -- one comeback. I'm not sure if I said options or not, I'd rather see restricted stock, so there is not as much dilution, because I'd rather see the guy get some stock and keep the numbers down. And my other comment was, I'm not sure what your numbers are. I think -- I think you're making maybe 400 -- I could be wrong. What are the top salary -- just for the top few guy, 3, 4, 500 a year?

The top is 400.

Top is 400. I'm just talking those guys. Not the -- not the rank and file. One last thing, I would hate to see you reduce the options if the company is going to work every stock out there that I've seen that reduced the option, it said hey, we're going to reprice for six months later, the stock doesn't do anything for a year or more and goes lower.

Let me make one last point about options. Most of our options -- well, the option program that we currently have ongoing in the company -

I think they're a lot higher priced, to tell you the truth.

It's a performance-based option. So for example, the key people in this company have got a very clear set of objective A very clear set of milestone, and the only -- only win the option if they achieve those milestones.

Right.

I think that's a very fair way to do it, and I think that keeps everybody very clearly focused. And, again, I'll go back and say that I don't believe that that is a substantial dilutive activity. And as I said, you know, we'd love the restricted stock, we continue to look at the restricted stock and this is one of the ramifications for the personal individual.

What are you -- you said they're based on the milestones. Is that on partnerships or is that on approvals or something different based on if we think they worked hard?

It's based on everything that goes on in the company. But -- well, sorry. The point there being that the milestones are only milestones that are value added to what we would consider shareholder price.

So let me give you an example. If an NDA gets filed, that's the end game in this company. If the NDA gets filed on time and we have a timetable worked out and I kind of reported that timetable to you this morning, the individual or the team of individuals that have been most involved with the filing of that NDA will win their options. And I think -- you know, if that NDA gets filed on time and we have a recognition of value in the company, those people deserve those options. So we're not doing it just for coming in -- coming to work in the morning and looking at our computers. We're doing it for clearly defined milestones. Study start dates, study finish dates and adherence to budget.

Good answer. Thank you.

Once again, if anybody does have a question, you may press star one at this time. Thank you.

Our next question comes from Steven Wolf (ph) from Wolf Money Management. Please state your question.

Hi, Geoff, how are you doing?

Good, thanks, Steve.

In the interim, as far as partnering, I know BP-3 would be later, I guess '04. Is near-term (ph) a possibility now or what is a possibility this year?

The near term partnerships?

Mm-hmm.

Well, I think the two areas we're focused on, Steve, are certainly BP-3 and the reason we're focused on BP-3 is because it's kind of outside our core expertise area. We've developed some nice pre-clinical evidence, we've been working with researchers at McGill (ph) University and we support you know, taking this product further. We've completed almost a manufacturing campaign, so we can make GMP drug material. And I think, you know, this position is very nicely to have in the discussions.

So, you know, what we do on a day to day basis is routinely make contact with partners and share data and information and plans with them. And that is an ongoing activity as we speak. And similarly, the same type of activity is going on in the diabetes area. Now, whilst all those discussions go on, we continue to focus on building the program further so that we're always building value.

I would very much love to see a partnership with BP-3 this year. I think it will give a tremendous boost to our credibility and stock price, but I will have to say I'm not going to do it on terms that I think are -- you know, that won't benefit the company. But again, I think we have some very nice data and we've shared this data with a few different folks and we're just waiting to work more closely with these guys.

So I guess BP-3 and diabetes, and you should really have still at least another year's worth of cash when you're going into, you know, the main -- the bulk of your partnering discussions.

Right.

Going back to what the other individual was talking about as far as being low on cash, you should still have some time.

Right. I think as I said earlier, sorry when I summarized, I think we're in an enviable position. I'd love to have more money in the bank, but right now having 27 or so million dollars in the bank with the products as advanced as they presently are and with the data showing efficacy. I think that's a very, very nice situation. You know, it gives partners an opportunities. So, you know, I'm feeling quite bullish. And it's my job to feel bullish.

I'm with you.

All right. Thanks, Steve.

Thank you. Your next question comes from Bob Walters (ph), a private investor.

Hi. Can you tell us what you know about the Biotechnology Value Fund? I believe they own over 10% of the stock. I vaguely remember that there is a limit on what can be bought. Is this a passive investment, have they asked to join the board? Can they add anything? They have some pretty impressive credentials in biotechnology and investment. I just wanted to know what you know about them.

First of all, good morning, Bob. I think we know a lot about them because we speak to them on a very regular, routine basis. If you've researched them, I think you'll find out, yes, they're a group of talented investors. They look at obviously value in biotechnology. I think they basically kind of concur with the remarks that I just made a few moments ago, that we are in an enviable position. We have money, we have product, we have opportunity. And I think they simply associate that with potential value. And they do own about 11 or 12% of the stock.

They have not -- they have not asked to join the board. They have not given me any indication that they've got plans we're not sure about. I think they've just simply view this as a good investment. And we're very pleased to interact with them and as I said, I interact with them very frequently. And, you know, they give me good advice. Not in terms of running the business, but more in terms of, you know, strategic advice. You know, strategic advice

Is there a limit on how much they can buy?

Yeah. They can go up to 15% before the shareholder rights banks kicks in. This is a passive investment, from our perspective.

Thank you very much.

Thank you.

Thank you. If there are no further questions, I will turn the conference back to Dr. Allan.

Well, thank you for tuning in to us this morning, and as always if anyone wants to call the company directly to talk to either myself, Baxter or Kevin for more information, we're always available. And we look forward to reporting our first quarter results when we have them. So thank you.

Thank you.

Thank you. Ladies and gentlemen, if you wish to access the replay for this call, you may do so by dialing 1800-428-6051, or 973-709-2089 with an I.D. number of 283427 as stated in the fourth quarter earnings release. This call will also be available at Insmed's corporate website, www.insmed.com. This concludes our conference for today, thank you all for participating and have a nice day.