Nektar Therapeutics (NKTR) 2003 Q1 法說會逐字稿

Thank you very much, operator. Welcome to the Nektar Therapeutics analyst conference call to review our first quarter, 2003 results. I'm Ajit Gil, President and CEO of Nektar Therapeutic, formerly known as Inhale Therapeutic Systems. Joining me are four other members of our management team. First Ajay Bansal, our new CFO, second, Chris Searcy, our Vice President of Corporate Development, third, Steve Charles, Vice President of the Business Development and Alliance Management in Huntsville, Alabama and last, but not least, Rob Chess, who is the Chairman of Nektar and well known to most of you. Before we get started, I need to review our Safe Harbor Statement.

The following presentation contains forward-looking statements that reflect our current views as to the company's business strategy, future products, product development, clinical trials, manufacturing scale up and other future events and operations relating to the company. These forward-looking statements also involve uncertainties and risks that are detailed in Nektar 's reports with the Securities and Exchange Commission, including our form 10K for 2002 . Actual results could differ materially from these forward-looking statements.

I would also like to remind you that the web broadcast of this conference call will be available for replay through May 6th, 2003, on the investor relation's at Nektar's web site at www.Nektar.com, that's Nektar spelled with a "K" and not a C. In the event that any non GAAP financial measures discussed on this conference call that is not described in our earnings release, related complementary material will be made available on the Investor Relations page at Nektar’s web site at www.Nektar.com as soon as practicable after the conclusion of this conference call.

Today we are reviewing our first quarter results with you. I am pleased to report that we made progress in the first quarter through advancements in our pipeline on both partnered and proprietary products, as well as scale up and regulatory filing preparations for Exubera. In addition to announcements in our advanced partnered programs, we continue to see strong interest in pharmaceutical and biotechnology [companies] desire to partner with us.

I will discuss this in reference to our 2003 milestones later during our prepared remarks . First, however, Ajay will review our financial results for the quarter . Next, Chris will review progress for our three key revenue drivers, which are first the Exubera program, next, our partnered products other than Exubera, and finally our proprietary products program. Following Chris, I'll close by reviewing our anticipated milestones for 2003. Then I'll open the call to questions. Before I turn the call over to Ajay, I'd like to say a few words about him.

As we announced in March, Brigid Makes, who was our CFO, was named our Vice President of Operations Management. We created this new executive position to drive development and implementation of management and operations processes, to achieve our growth and profitability objectives. This created an opening for a CFO and we are delighted that Ajay has joined us in that role. He brings broad pharmaceutical and biotechnology business and finance background to the company. Within the health care sector, Ajay held positions of increasing responsibility at V.S. Associates, McKinsey and company, Novartus, and Method Partners prior to joining us. We're pleased to welcome him to Nektar.

Now let me turn the call turnover over to Ajay to discuss our financial results.

Thank you Ajit. I'm pleased to be here on my first conference call as a part of Nektar. Let me briefly review our financial results for the first quarter. Revenues for the first quarter of $25.5 million. These revenues included $7.1 million for products, $18.4 million for contract research. This compares to total revenues of $26.7 million in the same period in 2002. Which included $5.4 million for products, and $21.3 million for contract research. I would like to take a moment to comment on these revenues.

First, we're heartened by the 31% growth in product revenues over the same period in 2002 of [inaudible] products to customers. This increase is primarily driven by serious increases for Pfizer’s [CEP H70] and Amgen's new [Laktar] which was commercialized last year. Second, the decline of approximately $3 million in our contract research revenues is primarily due to lower clinical drug and device sales for our partnered products.

As we said last year, our first quarter revenues in 2002 were quite strong, due to large sales under this category. Let us now turn to discuss our net loss. We reported a net loss of $19. 9 million or 36 cents per share for the 2003 quarter. The first quarter, 2003 net loss , compares to $25.1 million or 45 cents per share for the same period in 2002. Next our cash balance. Our cash balance, at the end of the quarter was $251.5 million, versus $294 million at the end of 2002. The net cash usage for the three months ending March 31st, 2003 was $42.5 million.

The first quarter cash usage amount does not reflect our projected quarterly usage for the remainder of the year. First, the cash balance and net cash usage do not reflect a $12.3 million receipt which was collected on April 1st, 2003. Further, first quarter cash usage included the following disbursement -- $2.6- million associated with the reduction in work force announced last quarter, and $1.3 million related to company's name change.

I would now like to discuss our guidance. For all of 2003, we reiterate our previous guidance. To restate, this guidance is, first on revenues, we anticipate revenue growth of 5% to 10 % with contract revenues remaining flat, and product revenues growing by 50% in 2003. Second, net loss. We project a net loss of approximately $97 to $ 100 million for 2003. And finally cash usage. We anticipate a reduction in cash reserves of approximately $100 to $105 million for 2003. For the next three quarters on a quarterly basis, our net loss will be approximately similar, but higher than this quarter.

On the cash usage side over the next three quarters, our cash usage per quarter would be approximately similar on a quarterly basis, but somewhat lower than this quarter. Beyond 2003, we're projecting a decrease in internally funded operating spending in the next 3 to 5 years. This reduction is based on a combination of three factors. First, the completion of a scale-up and commercial readiness spending for Exubera. Second, the anticipated conversion of some of our proprietary products from internal to partner funded, and finally, the shifting of infrastructure expenses to cost of goods sold for reimbursement by our partners through the sale of commercial products such as devices and drugs for the Exubera product. We expect these efforts, if coupled with increased product and [inaudible] revenues, can result in gradually reduced cash usage over the next few years, and help us reach our goal of operating profitability in 2006.

I will now like to turn the call over to Chris Searcy, who will review our progress this quarter in a key business segment.

Thank you Ajay. Let's turn now to review some of the progress we've made with Exubera, our other partnered product programs, and our proprietary products. First, let's look at Exubera. As we told you in our January conference call, Pfizer stated they do not anticipate filing Exubera for approval in 2003. As discussed in that call, Pfizer is generating long-term controlled safety data in both type I and type II patients. The type II studies were initiated in 2001 and the type I studies were initiated in 2002. The long-term controlled safety data that is available thus far is from the type II studies. These and other studies are currently ongoing. In addition, during their conference call today, Pfizer said that the major studies are ongoing and that they are currently in discussions with regulatory authorities, both the FDA and in Europe, and confirm that no filing date has been established. Pfizer says that this program remains strong.

We expect their funding for Nektar will be in the range of $45 to $55 million this year which does not include expenditures that Pfizer and [Aventis] are making on the clinical program. Pfizer has asked us to continue to work on a schedule to complete the chemistry manufacturing and control or CMC section of the NDA to facilitate the earliest possible regulatory filing. We view our job at Nektar as to be prepared so that when Pfizer Aventis prepares to file, we'll be in a position to support their effort. Let us now turn to a discussion of the second leg of our business, our partnered programs other than Exubera.

First, Pfizer, formerly Pharmacia Somavert was approved. That's the fifth product using

Nektar technology that has been approved in the United States. You may recall that the others are Amgen 's new [Lastra for neutropeia] , Schering-Plough’s [inaudible] for Hepatitis C, Roche’s Pegasys for Hepatitis C, the fourth approved product we recently disclosed in our 10K is Afinity with Bristol Meyers Squibb Medical Group.

Affinity is an ultrasound contrast agent that we have been characterizing as a diagnostic. I would like to make a few comments about Somavert. Somavert uses our advanced PEGylation technology for the treatment of certain patients with [Acramegaly] -- this is a serious debilitating disease caused by a non-cancerous tumor on the pituitary gland that produces increased quantities of growth hormone. Acramegaly potentially leads to growth of hands and feet, changes in face shape, swelling, headaches, hypertension , diabetes and other related symptoms. Approximately 40,000 patients in the United States , Europe and Japan suffer from acramegaly.

The mortality rate of acramegaly patients is two times higher than that of the normal population. Somavert is designed to block the binding of growth hormones produced by the pituitary gland. The next partnered product I would like to mention is Internmune’s hepatitis C product. Intermune announced in January they initiated a phase one clinical trial to evaluate peg alphacon, a pegyllated version of [Intergen’s], as a potential new treatment for chronic hepatitis C virus.

This is the third Interferon alpha product using our technology and provides significant improved economics compared to the earlier Pegasys and PEG-Intron deal. The final partnered product I’d like to discuss is the collaboration announced in January with the Straumann Group, a leader in implant dentistry to license, manufacture, and supply Nektar’s peg-based hydro gel technology for dental regeneration products. They expect to have the first products line using our technology to market in 2004. Of the $800 million dental implant business, Straumann is estimated to have about 20 % market share. They expect the improved PEGyllated implant product to add incremental levels to the business as they believe they only have about 5% of the population -- I'm sorry, only about 5% of the population needing implants currently receive them. So to summarize our partner pipeline, there are five products using our technology approved for market marketing in the U.S In addition there is a 6th one, spray gel, approved in Europe.

Of the 14 in the clinical pipeline in the U.S., including Exubera, four are in late stage development, four are in phase II clinical trials, and the remaining six are in phase I INow let us turn our discussion to the third leg of our business, the proprietary product opportunities. We announced in January a new phase in our growth towards becoming the leading broad-based drug delivery products company. As we said in January, we intend to increase our focus on using our technologies and capabilities to create highly differentiateed versions of already approved drug products. To that end, we will apply our technology through phase I and possibly early phase II clinical trials before partnering. This expanded business strategy is intended to first broaden our product pipeline, second, accelerate the development of products, and finally , enable us to provide our partners with more developed lower risk product. By developing these products through phase tone or two clinical trials, when we do partner them for late stage clinical development and commercial commercialization, we expect to be able to capture a larger share of the future economic value.

During the first quarter our most notable progress in the proprietary products program was the initiation of the phase I trial in the U.S. for a small molecule inhaled product, with the first patient dosing in march. We expect that phase I should be complete in the third quarter. We have chosen for competitive reasons not to reveal product name at this time. Overall, we're pleased with pipeline progress in the first quarter as we saw a 5th product approved and then two additional products enter the clinic. Let me now invite Ajit to provide an up date on 2003 milestones and to provide a closing summary for our prepared re marks.

Thanks, Chris. I would like to review our milestones in the same way that Chris reviewed our progress in each of the three business segments. First, let's look at Exubera. The next big milestone for Exubera is the filing date. At this time, we have nothing new to report on this milestone. The filing date will be determined by Pfizer and Aventis , based on their ongoing analysis of data as it becomes available, along with further discussions with regulatory authorities. Please keep in mind that completion of all studies beyond one year is not a prerequisite for filing, and that some studies likely will be continuing through the time of product approval and launch.

Over the past year and for 2003 , Pfizer has funded us to be prepared for the earliest possible filing date, so that when they choose to file file, Nektar is not delaying the filing process. For our other partnered products, we continue to anticipate that Confluent will finish [inaudible] trials this year for spray gel and file for approval either this year or next, and the [inaudible] trials for Macugen should be completed either this year or next. We are not aware of any guidance yet on the timing of the filing. If SprayGel and Macugen proceed as anticipated and Exubera files next year, we could have three new products approved or awaiting approval by the end of 2004.

With respect to our earliest stage partnered products pipeline, we project that by the end of 2004, one to two products will enter phase III and an additional one to three products will move to phase II. Furthermore, as mentioned previously, our partnership deal pipeline fins continues to be full, and we anticipate additional partnership deals before the end of 2003. I would also like to mention that our deal economics on our PEGylation partnerships on deals done over the last two years and new deals under discussion are superior in comparison to the economics and approved products using our pegyllation technology. These deals are typically in the mid-single digits as a percentage of our partner's revenue, although some are lower and some are higher.

Finally for our proprietary products program, we project that we'll have two additional products besides the small molecule inhaled super generic product discussed earlier [in] to the clinic by the end of 2004. Overall, we are satisfied with the progress made in the first quarter of 2003. We believe we're well positioned for strong revenue growth and a reduction in internally funded spending as we manage our business toward our goal of profitability. We believe we have three distinct and large opportunities to build a strong company in Exubera, the rest of the partner pipeline, and our proprietary products program. I'll now turn the call over to all of you for questions. Operator, would you please poll for questions.

Thank you. We will now begin the question and answer session. If you have a question, you will need to press the 1 on your touchtone phone. You will hear an acknowledgment that you have been placed in queue. If your question has been answered and you wish to be removed from the queue, please press the pound sign. Your questions will be queued in the order they are received. If you are using the speakerphone, please pick up the handset before pressing the numbers. Once again, if there are any questions, please press the 1 on your touchtone phone. Our first question is from student Stuart Michelin of BRT Biomed. Please state your question.

Hi, Ajit, very nice report. I have just a couple of brief questions. First, I'm concerned about your burn, with your starting up your proprietary products, which I think is a great idea to leverage your abilities. I wonder why you don't anticipate that your burn in terms of your cash this year will be worse than last year?

Ajay, would you like to answer that ?

As we have guided previously, we're expecting our burn in the range of $100 to $105 million of cash usage in the range of $100 to $105 million. Within that cash usage, we have carved out approximately $18 million of cash usage for proprietary products as we have guided to you in our January conference call. Based on the outlook for the rest of the year, we feel pretty confident that we will be able to hit our cash usage targets of $100 to $105 million while funding our proprietary programs at that level.

Thank you. And just a second quick question. SprayGel is available in Europe. I wonder how the product is doing there?

Steve, would you like to take take -- answer that question ?

Yeah, we have not received any guidance from Confluent on their sales volume. I think you would have to ask them.

Thank you, gentlemen.

Our next question comes from Tom Stingel, Imperial Capital. Please state your question.

Good afternoon, and thanks for the update. I'm looking at your working capital items, particularly accounts payable, which in December were $40 million, have fallen to about $32 million, and deferred revenue fell from $22 to $ 8 million. That looks like a $20 million cash outflow. Can you comment on the causes of that and give us some color on the $12 million you received post the quarter end?

Right. As you correctly point out, there's a significant decline in the deferred revenues from $22 million to $8.3 million. Ordinarily the $12.3 million cash receipt should have happened at the end of March, thereby you would have seen the numbers somewhat differently, meaning more in line with each other as opposed to the big decline that you see. With respect to the decline in the accounts payable and accrued liabilities, some of those cash disbursements we touched upon during the script, during our prepared remarks, that of $2.3 million with respect to a reduction in force that was enacted last quarter, as well as a $1.3 million disbursement related to our company name change. The other elements that lead to the changes in the accrued liabilities and accounts payable are more timing issues, and as such, based on all of that, we still feel pretty comfortable with cash usage for the year of $100 to $105 million.

Thank you, very much.

Our next question comes from Richard Mensori of Terra Partners. Please state your question.

Thank you. Just a balance sheet question. In this current low interest rate environment, granted the company has got $250 some million in cash, but the company I see also that is $300 million or thereabouts in debt securities, which my understanding are yielding high teens on a percentage basis. I'm trying to understand a little bit more about the company's plans in terms of possibly taking advantage of the disparity and perhaps reducing the debt outstanding or doing something else that could somehow narrow the interest differential.

You know, on the debt situation, it is something in the overall cash management. That is something that we obviously monitor very carefully on an ongoing basis. In terms of some of the specifics, let me just ask Ajay to add a few more comments on the specifics of the debt.

As you mentioned, we have about $299 million in debt. That is comprised of three different instruments. The first instrument is $7.8 million in outstanding with the coupon of about 6.75 % and due October of '06.

The second one is an outstanding of $61.4 million, with a 5% coupon rate due in February of '07. And the balance of $230 million carries a 3.5% coupon, due in October of '07. As you can imagine, we have debated intensely internally whether or not we should be using some of our cash to buy back the debt.

And we are looking at other options to reduce the debt burden as well. At this stage, we cannot provide you any specifics on what we plan to do or what we might do with respect to buying back of the debt, but obviously, as Ajit and Chris covered in their prepared remarks, our business moral remains very strong and we are investing the cash to take us to profitability in the near term, and as we said, our goal toward profitability is '06. We believe that once we achieve our goal of operating profitability, that will allow us to handle the debt in the most advantageous way for our equity holders.

I understand. So just to reiterate it, you are aware, though, of the deep discount that the debt is trading at. You are at least aware and focused on it, correct?

Absolutely. I mean, that is something that we monitor on an ongoing basis. Absolutely, yes.

I must add that I probably receive at least two calls per week from, you know, various brokerage houses that are inquiring whether we are looking to buy our debt. So that keeps us pretty apprised of the situation.

I understand. Okay, thank you.

Our next question comes from Harry Simbasava from Merrill Lynch. Please state your question.

Hi, yes, thank you. Just a related question on the cash usage. The R&D for the quarter also was somewhat below the sort of the number that I was looking for just by a few million dollars. Is this a timing related issue? Are there certain programs that were either delayed or not started? I'm just wondering where you are in relation to the annual sort of R&D expense and where -- whether you anticipate on sort of a making that number up for the remaining -- remaining three quarters?

And Harry, is your question in terms of the reduction, are you looking at it --

Well, I was looking, I guess, for numbers -- R&D expenditures somewhere in the sort of $150 million region for the year, and we have about $32 in the quarter, and I'm just trying to figure out whether there is going to be a steep, you know, ascending number in the upcoming quarters.

Yeah, actually, yeah, we anticipate that the full-year numbers will turn out pretty much in line with what our projections were, okay? And so some of the reductions in the first quarter were really timing related items, and so over the course of the year, we would anticipate that both revenue and expenses at this point we see as, you know, being consistent with what our earlier guidance was. And --

Yeah, Harry, one of the things we also mentioned with respect to the product revenues, regarding the clinical supplies and device sales that were lower this quarter, that obviously has an offsetting feature in the R & D as well.

I, yes, thank you.

Our next question comes from Ian Sanderson of SG Cowen. Please state your question.

Thanks for taking the question. Could you just quickly walk through the cost of goods as a percent of your supply sales and and -- it's been kind of volatile over the last couple of quarters, and can you just give us some sort of guidance where we should expect that to be through the balance of the year?

Right. Ian -- good question. Ian, the cost of goods in this quarter, compared to a year ago quarter was impacted primarily by two factors. One is change in products made and secondly we started paying royalties to Enzon on one of the products that’s on the market today. So, those two elements have brought our cost of goods -- increased the cost of goods or reduced our growth margins in this quarter compared to the same quarter last year. Going forward, we would expect our cost of goods or growth margins on our product sales to be more or less in line with what we have this quarter, although given the fact that our margins on the different products that constitute our products sales, differ you would expect that to bounce around somewhat, but largely speaking, they should hold constant to what you see in this quarter and of course, markedly improve as new products are launched.

Thank you.

Our next question comes from Leah Hartman of CRT Capital Group. Please state your question.

Good afternoon, I just had a couple of housekeeping questions. What was the depreciation and amortization expense in the quarter?

The amortization expense in the quarter was about a million dollars, just north of a million dollars, at $1.1, and the depreciation number combined with the amortization was roughly about $4 million, so say just shy of $3 million on depreciation and just north of a million dollars on amortization.

Okay. And is the tenant improvement loan still outstanding and is that amortizing presently?

Yes, the tenant loan is still outstanding .

That was approximately $5 million?

That's right.

Does that have any notable amortization schedule?

Nothing notable.

Okay. I think I had it as about a half a million a year .

Yeah , give or take that’s in the ballpark.

Okay. And then you still have the build-to- suit lease commitment on it on an annual basis running $5 to $6 million?

We do have that commitment , and of course, you know, we depending on everything else, and what happens to sort of the lease, et cetera, we will decide whether we use it or not.

Okay. Thank you very much.

Once again, if there are any questions, please touch the 1 on your touch tone phone.

We have no further questions at this time.

In that case, I would like to thank everybody for attending our conference call, and thank you, operator.

Ladies and gentlemen, this does conclude today's teleconference, thank you for participating. You may now disconnect.