Ionis Pharmaceuticals Inc (IONS) 2002 Q3 法說會逐字稿

Ladies and gentlemen, thank you for standing by.

Welcome to the Isis Pharmaceuticals Third Quarter Financial Results Conference Call.

During the presentation all participants will be in a listen-only mode.

Later we will conduct a question and answer session.

At that time, if you do have a question you will need to press the one followed by the four on your pushbutton phone.

As a reminder, this conference is being recorded Wednesday November 6, 2002.

I would now like to the turn the conference over to Dr. Stanley Crooke, Chairman and Chief Executive Officer.

Please go ahead.

Thank you, Alex.

And thanks to everyone for your flexibility in joining us on today's conference call.

We've moved the call up by a day because of the news that we have concerning our collaborations with Elan.

We finished the negotiations with Elan just last night, and so we needed to move the conference call up because obviously that was an important event.

We do have a very full agenda, and Lynne Parshall, our Executive Vice President and CFO, and Beth Hougen, Vice President of Finance will help me cover it and answer your questions following our prepared remarks.

The changes in HepaSense and Orasense joint ventures are first on the agenda.

We are delighted to regain ownership of ISIS 14803 as a result of the renegotiations of the HepaSense agreement.

I think particularly in light of the very positive (inaudible) that reported just yesterday.

In addition, we have extended our Orasense joint venture through the end of 2002.

After that, we will review our third quarter and year-to-date financial performance.

We'll then discuss a key decision that was made to terminate GeneTrove's database product offering.

As you know, we have been disappointed with that particular product offering, that particular piece of GeneTrove.

It's clear that the database has not been as successful as we'd hoped.

We've assessed the potential of the product relative to the required expense.

We've concluded that the GeneTrove database no longer justifies continuing investment, and so we've taken action accordingly by cutting this product from the division and making the necessary restructuring.

As the last item on the agenda, we will provide updated guidance on our net operating loss and describe the factors that have led to the revision that we'll be reporting.

Importantly, Isis has been a very strong financial acquisition and we have 292 million in cash at the end of the third quarter.

We have resources to advance our pipeline to 13 drugs, and we believe that that is of course the path that we've always been on and the most effective path for maximizing shareholder value.

Now particularly, given the year that we've had with positive reports of clinical performance of all of the drugs at one point or another during this year.

Before we begin, Karen Lundstedt, our Vice President of Corporate Communications will review our policy on forward-looking statements.

This press release contains forward-looking statements concerning the financial division of potential of Isis Pharmaceuticals, the prospect of (inaudible) non-small cell lung cancer, our cap percent (phonetic) of ISIS 2302 and Chrohn's Disease, of ISIS 14803 and Hepatitis C, of the Orasense Oral Formulations Program, and of the other drug products being developed by the company, as well as the company's ability to earn up to 120 million in revenues as a manufacturer of (inaudible) during the launch period, and the potential value of the company's (inaudible) and drug discovery technology platform.

Any statement describing a goal, projection, expectation, intention, or belief of the company is a forward-looking statement and should be considered an at-risk statement.

Such statements are subject to certain risks and uncertainties, particularly those inherent in the process of discovering, developing, and commercializing drugs that are safe and effective for use as human therapeutics, and financing such activities.

Actual results could differ materially from those projected in this conference call.

As a result, you are cautioned not to rely on these forward-looking statements.

These and other risks concerning Isis research and development programs are described in additional detail in the company's annual report on form 10-K and quarterly report on form 10-Q for the periods ended December 31, 2001 and June 30, 2002 respectively, which are on file with the U.S.

Securities and Exchange Commission.

Copies of these and other files are available from the company.

Lynne?

Thanks, Karen.

My (inaudible) will proceed according to the agenda Stan laid out at the beginning of the conference call, starting with the transactions we've just completed with Elan.

As you know, we've been collaborating with Elan in two joint ventures: HepaSense and Orasense.

HepaSense is focused on the clinical development of the antisense drug ISIS 14803 for patients with Hepatitis C. Orasense is our joint venture to develop an oral platform for antisense drugs, and to develop an oral formulation of ISIS 104838 and the antisense inhibitor TNF alpha for the treatment of rheumatoid arthritis.

With regard to HepaSense we're very pleased that we've regained ownership of ISIS 14803, an exciting antisense drug that we believe has the potential to be an important new agent in the treatment of Hepatitis C and represents significant commercial opportunity for Isis.

Earlier this week, actually just yesterday, we presented data from two studies that demonstrated that ISIS 14803 is active in drug resistant genotype 1 HCV patients, the most difficult to treat patient population.

In the third trial in which patients were dosed for month, ISIS 14803 resulted in significant viral titer reductions.

In the second trial in which patients were dosed for three months, even more profound viral titer reductions were observed in 6 of the 17 patients.

We believe that ISIS 14803 is a valuable asset, and its return to Isis has dramatically enhanced its value to us.

The development of ISIS 14803 has been the focus of the HepaSense joint venture.

Elan has concluded its participation in the HepaSense collaboration in conjunction with continuing restructuring efforts.

As a result, we regained all rights to ISIS 14803 with the potential royalty due to HepaSense.

Because of the termination of the collaboration we will not receive non-cash revenue that we have projected from HepaSense for the second half of this year.

The impact on cash is not material because of the steps we took earlier this year.

As you may recall, our portion of the HepaSense joint venture expenses was originally funded through a loan from Elan.

Earlier this year, we decided to fund our share of the collaboration expenses using our own cash rather than incurring additional high-priced debt from Elan.

Therefore, the conclusion of Elan's participation does not meaningfully affect our projected cash position.

Most importantly, we've regained control of a key asset, which we believe has significant commercial potential in a patient population that's desperate for improved therapy.

We believe, in fact, it will have significant long-term value for Isis and we look forward to updating you on the continuous development of this antisense drug.

In our Orasense joint venture, we've been making exciting progress in the creation of oral formulations for antisense drugs.

The joint venture is moving aggressively towards the development of an oral formulation for ISIS 104838, an antisense inhibitor of TNF-alpha for the treatment of rheumatoid arthritis.

Elan and we have agreed to extend our Orasense collaboration through the end of 2002.

Similar to the original joint venture contract, Elan will continue to fund the joint venture according to its ownership provision, which is 19.9% and which cannot increase.

In 2003, Elan has the opportunity to continue or conclude its participation in Orasense.

If they elect to conclude their funding of the joint venture next year, Elan's 19.9% ownership position, as well as their royalty position, will decline as Isis continues to invest in the oral formulation of antisense drugs, including ISIS 104838.

In addition, we've provisioned a place for Isis to buy-out Elan's ownership position when its stake is sufficiently small.

We believe this has been an excellent outcome for Orasense as we continue to receive funding for the remainder of the year and have chartered a path to increase ownership of this asset.

We believe the advances in oral deliveries that are emerging from Orasense are extremely important as they create the opportunity for antisense pills.

We will present data from Phase I studies of oral formulations of our TNF-alpha inhibitor, ISIS 104838, next week at the 2002 American Association of Pharmaceutical Scientist Meeting and Exposition.

We're very enthusiastic about the commercial potential of an oral antisense inhibitor of TNF-alpha to improve the treatment of another very significant patient population: people who suffer with rheumatoid arthritis.

So in summary, we've regained ownership of ISIS 14803, a very exciting drug for hepatitis C and we're advancing our oral formulation program through Orasense.

Now, I'll go on to discuss the third quarter financial results both for the quarter and the year-to-date.

I'll briefly review the following financial measures: revenue, operating expenses, net operating loss, and our balance sheet.

Our revenue for the third quarter 2002 totaled $20.3 million, which represented a slight increase of the revenue in the same period last year.

Our revenue is variable on a quarter-to-quarter basis due to timing differences associated with revenue from our partners.

So the quarterly revenue does not directly reflect revenue trends.

Revenue for the first nine months of 2002 was 58.3 million, which was an increase of 85% over the same period last year.

The increased revenue was primarily due to ongoing clinical development of the Affinitac, which Lilly funds.

Our operating expenses for the third quarter 2002 totaled $37.8 million, up from $24 million in the third quarter 2001.

For the nine months ended September 30, 2002, operating expenses totaled 97.9 million, compared to 69.9 million for the same period last year.

The increase was primarily due to several factors relating to our products and partnerships.

First, our Phase III trials of Affinitac in non-small cell lung cancer is in progress and we incurred expenses related to the ongoing development of the drug.

Second, we continue to advance and sell on the other 12 products in our pipeline.

The third quarter was the first full period in which both Phase III trials of alicaforsen and Chrohn's Disease were underway.

Third, we're making progress in our $100 million, multiyear antisense drug discovery and research collaboration with Lilly.

As you may recall, this collaboration is funded through an interest-free loan from Lilly, so the expenses incurred by the collaboration that appear as operating expenses while the payment for the work is not recognized as revenue.

And fourth, also in this quarter we had continued costs associated with activities that supported the company's numerous GeneTrove collaborations and costs associated with our database development.

The increased operating expenses I've just described were reflected in our loss for operations for the third quarter.

We reported a loss for operations for the quarter of $17.5 million.

Our loss from operations for the first nine months of 2002 was $39.6 million, which is in line with the loss from operations for the same period last year of 38.4 million.

Importantly, we continue to maintain a strong cash position that can support our multiple research and development program.

We ended the third quarter of 2002 with a various (phonetic) continued strong cash balance of $292 million in cash and short-term investments and $261 million in working capital.

At December 31, 2001, we had $312 million in cash and short-term investments and working capital of 281 million.

Our present cash balance added to about $60 million in additional committed funding from the research collaboration with Lilly and approximately $80 million in committed funding from other partners take the total cash and committed cash to roughly $435 million over the next few years.

With that summary of the quarter's finances, I'd like now to discuss the business decision we've made about our GeneTrove database.

Our GeneTrove division is a successful component of the Company as its product offerings generate revenue and play a strategic role in helping large pharmaceutical companies gain experience with antisense technology.

We've been doing (inaudible) in our custom target validation program where we have 1,400 genes under contract, as well as in our electro property-licensing program where several companies have licensed our functional genomic fleet patents to support their internal drug discovery program.

Big (phonetic) products allow us to monetize the front end of our drug discovery process.

We're essentially selling the byproducts of our research, the information about what genes do.

The custom target validation services we provide the partners are strategically aligned with our own drug discovery and development effort.

The third product offered within GeneTrove, the database, is a product that's not on our critical path to success.

The database business has not produce revenue or strategic value for us, as we have not sold any database subscriptions.

It's clear to us now that the market has changed dramatically over the past year.

The appetite of large pharmaceutical companies for functional genomic tools and database products in particular has dropped precipitously, largely due to a saturation of information on genes, as well as increase in operating pressure that slights (phonetic) the sector.

So the outlook for a database business, even one as scientifically exciting as ours is unpromising.

And we've determined that further investment is not warranted.

As a result, we've reduced our workforce by approximately 25 people who are associated with the database program.

This cut will reduce research expenses modestly this year and by about $67 million next year.

We will reorganize the GeneTrove division and in the process enhance our research focus.

As a result of this reorganization, we will incur a one-time charge for restructuring activities of approximately $1.2 million.

Our GeneTrove division will continue to provide custom target validation services to partners and offer intellectual property licenses to partners that choose to do antisense based functional genomic activities in-house.

These two products will continue to generate value for the company and to take advantage of our primary focus, the discovery and development of new antisense drugs.

So now back to financials.

First we're very pleased with our cash position of $292 million to provide resources to pursue the development of our substantial pipeline of antisense drugs.

Second, we've reacquired the rights to a very exciting drug for Hepatitis C, ISIS 14803, which is a strategically important transaction for Isis that offers the potential for significant financial and commercial upside.

In the near term, however, this event is associated with an essentially non-cash decrease in revenue.

The discontinuation of HepaSense revenue and our termination of our database product offering have led us to reexamine the guidance from that operating loss that we gave at the beginning of the year.

We've adjusted our NOL guidance slightly upward to be in the low $50 million range, excluding non-cash compensation expenses and the one time charge associated with database termination, rather than the mid-$40 million range.

To ensure we meet our revised guidance, we've taken appropriate expense reduction measures to control spending without significantly impacting our productivity for the rest of the year.

Both of the factors related to this NOL revision are strategically a financially important event.

We are focused on creating and enhancing opportunities for the success of antisense drugs and our technology platform, and we're pleased with the progress we've made this year.

That concludes my prepared remarks.

So now I'll turn the presentation back to Stan.

Thanks, Lynne.

I’m going to just summarize very quickly some of Lynne's comments, and then, of course, we'll take your questions.

I think this has been a very, very good quarter for us, and I'm happy with the accomplishments that we've made.

As many of you know, we've been negotiating with Elan now for quite a long time to reorganize our relationships on for OraSense and HepaSense and have reacquired our Hepatitis C drug, ISIS 14803, with the kind of positive data that we're generating in the clinic with that drug is really important and strategically valuable accomplishment that we're very proud of.

We announced earlier that we completed our strategic manufacturing agreement with Eli Lilly and that expands our participation in the success of Affinitac, and long term it provides the opportunity to expand our manufacturing facility and to improve the quality of that facility.

And I was just in--we're just finishing building now, and I was just in it yesterday.

And I have to say it really looks wonderful, and it's an important asset for the company that will be appreciated over time.

We successfully settled our patent infringement litigation with Sequitur.

And Sequitur has taken a license-to-license patents for target validation activity.

And, of course, that provides added strength to our patent position and the fact that we've achieved significant numbers of licenses for those patents for companies that are using antisense for target validations, just another manifestation of the breadth and importance and value of our patent estate.

We announced, in fact, that we have more than 1,000 issued patents about a month ago.

The latest number now is 1,068, so we continue to have patents that issue.

And I think we've made tremendous progress with the continued development of our pipeline and our technology this year.

So we've had a great year.

Of course, I'm disappointed that the GeneTrove database product wasn't successful within the time frame that we've allowed it, but it's imperative that we manage our resources in a manner that drives toward our goal of commercializing drugs.

And I think the steps that we've taken with the GeneTrove database are appropriate, the timing is appropriate and makes certain that we're going to spend our money wisely.

On doing all this, we've had to adjust our NOL guidance and that's disappointing, too, but the long-term benefit of what we've accomplished far outweighs the short-term P&L effect and, of course, the short-term P&L effects in this particular case have little effect on the key financial component of the company, the cash.

So we're watching our expenses, and we're working to decrease costs to minimize our operating loss, while we continue to develop our pipeline as aggressively as possible.

And the pipeline looks great.

And the pipeline reflects, I think, the broadening potential of antisense technology as a drug discovery platform.

We believe that the progress of the technology and the products in the pipeline this year continue to fuel appropriate optimism, and we'll continue to invest.

In fact, we had clinical evidence of antisense drug activity now in multiple diseases by multiple (inaudible) of administration with multiple drug.

Vitravene, the first antisense drug on the market, and it might be the drug of choice for CMV Retinitis.

Affinitac, the positive data and (inaudible) carcinoma (phonetic) 1, the phase two data that he reported.

ISIS 2503 administered IV for pancreatic cancer was reported preliminary positive data earlier this year, and we'll be reporting on the completion of that study later.

The activity of ISIS 2302 (inaudible) administered intravenously.

The positive data of ISIS 2302 when administered as an enema in active colitis, and then just this week, the confirmation of the exciting activity of ISIS 14803 in Hepatitis C. You add to that the emergence of our second-generation antisense drugs and the progress that we're making in oral delivery, and I think this marks another year of superb accomplishments for the company.

We'll look forward to updating you on our progress.

We very much appreciate your continued support, and we very much appreciate the fact that you've managed to find your way onto the conference call a day earlier than we had planned.

And I think you can understand that we needed to move it forward given the importance that we have on renegotiation and the accomplishments there.

So, Robert, if you will, set us up for Q&A, and we'll begin to answer your questions.

Thank you.

Ladies and Gentlemen, if you do have a question, you will need to press the one followed by the four on your pushbutton phone.

You will hear a three-tone prompt to acknowledge your request.

If your question has been answered and you wish to withdraw your polling request you may do so by pressing the one followed by the three.

If you are using a speakerphone, please pick up your handset before entering your request.

Once again, ladies and gentlemen, if you do have a question, please press the one followed by the four.

The first question will come from the line of [GEORGE SASSEK] from Dominick & Dominick (phonetic), please go ahead.

The question of ISIS 14803, now that you've got clinical data, what is the future of it?

Is it going to be renegotiated with somebody else or are you going to undertake it?

Then second question, you've gone through several rounds of restructuring, staff reduction, you’ve done it again.

Is this implying that Isis has got a perpetual state of development stage or is there an important change in strategy needed so as to more or less give a more steady trend of progression of operations?

Thanks, George.

ISIS 14803 is active and we are right now planning the next series of studies that should progress it toward an MBA (phonetic).

My opinion of the first generation antisense drugs--it's a drug that we may choose to license at key value inflection points, we're prepared to develop and to sell.

But if the terms are right, then it's an asset that we're more than willing to consider as a licensing opportunity.

With regard to restructuring, I think I should just clarify that Isis is now 13 years old.

Our average turnover, voluntary turnover for the last 13 years has been 4%.

The average in the pharmaceutical industry or in the biotech industry is 26%.

We have had measured and steady growth throughout the history of the company and we've never had a restructuring except after the disappointment of 2302 two years ago.

So we have never experienced unbridled growth nor have we ever had a process of multiple restructuring.

This has been an extraordinarily stable environment.

Most of the people who were here at the founding of the company are still here.

And this is an environment that people, our employees, do not want to leave.

What's happened here today is that we made a decision some time ago to build a GeneTrove database business.

We now know that GeneTrove database business isn't going to be successful.

The business opportunity was a byproduct opportunity that would allow us to generate some added revenue and so it made sense to go after it.

But it's not on a critical path to anything at Isis and now that we've concluded that it's not going to do for us what we hoped it would do, it makes total sense to restructure that business and ended it and stopped spending shareholder money on that when we have so much good things, so many good things to spend shareholder money on.

So I want to just reemphasize this, we have never had a series of restructuring and we have had an extraordinarily stable, positive, productive, constructive environment in this company and we'll continue to do that.

The next question will come from Andrew Gitkin from UBS Warburg.

Please go ahead.

Hi, thank you.

Just a question for Lynne.

If you could just walk through again, just to make sure we have it, the exact financial impact of just the changing or terminating the Elan relationship in HepaSense, and also what is the cash position again at the end of the third quarter?

The cash position at the end of the third quarter is 292 million.

The financial impact of ending the collaboration for HepaSense resulted in a projected $5 million worth of revenue we had projected that we would have this year that we didn't get, but only a negligible impact on our cash because we had projected that we would continue to fund our share of the HepaSense expenses as we've been doing for the year.

Okay, great.

Thank you very much.

Okay.

Next question?

The next question will come from Darren Mac through Fulcrum Global Partners, please go ahead.

Hi, guys.

Had a couple questions here.

First on HepaSense, are you still planning on potentially using Elan's the MEDIPAD subcutaneous infusion pump?

Or are you going to stick with intravenous dosing?

We haven't made a final decision about that, Darren.

One of the key factors in what we'll do there will be the performance of the once a week dose as opposed to the twice a week dose.

The experiment that we just completed caused us to be somewhat optimistic that we can reduce the dose frequency, you know, even twice a week.

And the level of activity, if you think about this in combination with phuron (phonetic) (inaudible) lab environments, however you want to look at the process, we think would support the drug being developed as an intravenous product.

So we will continue to consider the subcutaneous approach, but right now we're focused on sorting out the minimum dose schedule and the right combination to use the drug in as our primary focus.

Okay.

Then on the Orasense collaboration, is Elan's ownership stake and royalty, potential royalty stream, are those applicable only to the TNF-alpha compound, or to all future oral formulations?

Their royalty comes into play when there's intellectual property in Orasense that covers the product.

And it could apply to all oral products that you see Orasense developed oral formulation.

Okay.

Then finally on the Amgen drug discovery collaboration, can you give us any sense of how things are progressing there if we might be able to expect something entering the clinic over the next year, year and a half?

What I can tell you is that the collaboration is moving along actually very successfully.

We're very pleased with it and I think if you talk to your friends at Amgen they'll tell you they're also very pleased.

I can't get into any more details about what drugs might enter the clinic because obviously that's an Amgen decision and the communication about those product opportunities is an Amgen decision as well.

Okay, great.

Thank you.

The next question will come from the line of Mark Monane from Needham & Company.

Please go ahead.

Hi.

Good morning.

Thank you.

A couple questions: Please could you update us in all of the good work that has been done on GeneTrove?

We heard about the database project but can you go over those numbers again for us--how many collaborators you've had and how you positioned GeneTrove within Isis?

Yeah.

Remember that we automated antisense a few years ago for our own purposes.

We then realize that there was an opportunity to monetize our early drug discovery activity by selling the byproduct, which is information.

That led to the formation of GeneTrove and we set out first to build the custom target validation.

This was then our goal, and I think we were very exclusive with this last year was to have 100 genes under contract and we completed the year with about 1,300 genes under contract.

So that piece of the business (audio gap) extraordinarily successful.

We've added other partnerships this year so we have about 1,400 genes under contract.

And so that piece of the business was extremely successful and it also helped bridge the difficult time that we had after 2302 disappoint in the first Chrohn's study.

The second piece of the business was the licensing of the (inaudible) for those companies that would like to do antisense target validation in their own shops.

And again, that's been very successful.

We've announced quite a number of licenses and we announced the successful conclusion of litigation against one of the significant infringers of those patents and that was successful.

So those two pieces of the business have been both tactically and strategically very successful for the company.

And remember in the custom target validation business we sell only the information we keep the antisense drug rights.

So they've also facilitated, of course, a significant enlargement of our gene patent estate because the funding would support the patent.

And what we have been saying for the last year or so was that the third component that we though the first two components of the GeneTrove business were very successful and the third component, which was the database, we hoped would be successful but the jury was still out and we didn't know whether it was going to be successful.

Jury's in.

The world's changed.

The database business is just not a good business.

It's not essential to what we want to accomplish and we're taking the appropriate steps in financial conclusion.

Does that answer your questions, Mark?

That's very good summary.

I have two other quick questions.

Can you update us on two of my personal favorite programs, the pancreatic cancer program and the different formulations going forward in psoriasis?

Yes.

With regard to pancreatic cancer, we reported earlier in the year ISIS 2503 produced encouraging responses in the (inaudible) analysis of the 48-patient file.

I think in December we'll be reporting the results of the entire 48-patient file and I'm not at liberty to provide any more insight into the results of that trial at this point, other than to say that we remain encouraged about the drug.

The second question related to psoriasis.

You'll recall that we reported some key and very important positive data with 2302 in human trials and that was that we could get antisense drugs across skin and with very simple formulations both in psoriatic patients in a fashion similar to what we've seen in animals.

That was the key goal of that trial.

We also demonstrated statistically significant reductions in the primary end point in that trial which was (inaudible).

We have a second trial with 104838, the TNF-alpha inhibitor, topically in patients with psoriasis and that trial is being completed and will be analyzed shortly.

One of the lessons that we took from the 2302 study was--and a lot of other extremes in psoriasis--was that topical treatment may not be sufficient to manage psoriasis and so we have another study planned in which we will combine both topical and parenteral administration of our TNF-alpha inhibitor for the treatment of psoriasis.

That study has not begun yet primarily because it's been prioritized somewhat lower than the other trials that we have in progress.

And simply haven't had the manpower or the funding to begin that trial yet.

But we do intend to come back to do that in the future.

So we'll be in the next year un-blinding the topical 104838 psoriasis trial and we'll be depending on just how many projects we have and what we can afford, we'll be beginning then the topical plus parenteral trial about which we are most excited.

And I think TNF-alpha is, of course, a very exciting target of that sort of combined roots of administration approach that we're talking about.

Terrific.

Thanks for the update and congratulations on your progress.

Thanks very much, Mark.

The next question will come from the line of David Bouchey from Unterberg, Towbin.

Please go ahead.

Yes.

Can you give us some guidance on what the changes and revenues for 2003 will be as a result of your regaining rights to HepaSense?

No, not today.

I think the guidance that we've been giving--the only guidance I can give is that we believe, as we've said all year, that we can manage next year's activities in about the same range as this year.

Okay.

Thanks.

Okay.

If there are any additional questions, please press the one followed by the four at this time.

Once again, ladies and gentlemen, if you do have a question, please press the one followed by the four.

If there are no other questions, we'll bring this call to a conclusion.

We appreciate your interest and we particularly appreciate your flexibility in joining us on the call a day early.

And we'll keep you posted on the progress as we go forward.

Thanks very much.