Nektar Therapeutics (NKTR) 2003 Q2 法說會逐字稿

Good afternoon, ladies and gentlemen, and welcome to the Nektar financial results conference call. (CALLER INSTRUCTIONS). I would now like to turn the call over to Mr. Ajit Gill, Chief Executive Officer of Nektar Therapeutics. Mr. Gill, you may begin.

Thank you. Welcome to the Nektar Therapeutics analysts' conference call to review our second quarter 2003 results. I'm Ajit Gill, President of CEO of Nektar Therapeutics, formerly known as Inhale Therapeutic Systems. Joining me today are our Chairman, Rob Chess, our CFO Ajay Bansal; our Vice President of Corporate Development, Chris Searcy, and Milton Harris, Head of our (indiscernible) Engineering Division.

Before we get started, I'd like 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, funding, clinical trials manufacturing scale up and other future events and operations relating to the Company. These forward-looking statements involve uncertainties and other risks that are detailed in Nektar's reports and other filings with the SEC, including our annual report on Form 10-K for the year ended December 31st, 2002, as amended, and our quarterly report on Form 10-Q for the fiscal quarter ended March 31st, 2003. Actual results could differ materially from these forward-looking statements. I would like to remind you that the Web broadcast of this conference call will be available for replay through August 20th, 2003 on the Investor Relations page at Nektar's Website at www.nektar.com. In the event that any non-GAAP financial measures discussed on this conference call that is not described in our earnings release, related complementary information will be made available on the Investor Relations page in our Website as soon as practicable, after the conclusion of this conference call.

Today we will review our second quarter results. I am pleased to report that we have made progress on many fronts, including first, advancement in the pipeline of three partner products using Nektar technology. Second, additional data from Exubera studies conducted by Pfizer and Aventis that are encouraging. Third, new promising pre-clinical data for inhaled PEGylated insulin, one of our first proprietary products that combined our inhalation and PEGylation technologies. And fourth, improving our cash position by completing a convertible subordinated notes offering. In addition to these advancements, we continued to see strong interest in pharmaceutical and biotechnology companies' desire to partner with us. I will discuss this in reference to our 2003 milestones created during our prepared remarks.

First, however, Ajay will review our financial results for the quarter ended March 31st, and for the first six months of 2003. Next, Chris will review progress for our three key revenue drivers which are the Exubera program, our partner products other than Exubera, and our proprietary products program. Following Chris, I will close by reviewing our anticipated milestones for 2003, 2004, and finally, I will open the call to questions. Now, I will turn the call over to Ajay to discuss our financial results.

Thank you, Ajit, and welcome to all of you on the call. Let me briefly review our financial results for the second quarter and for the first six months of 2003. We reported total revenues for the second quarter of $27.7 million versus revenues of $22.3 million for the second quarter of 2002. In 2003, product revenues were $6.5 million versus $3.4 million in 2002, and contract research revenues totaled $21.2 million in 2003 versus $18.8 million in 2002.

For the first six months of 2003, we reported total revenues of $53.3 million versus revenues of $49 million in the same period in 2002.

In 2003, product revenues were $13.7 million versus $8.9 million in 2002, and contract research revenues totaled $39.6 million in 2003 versus $40.1 million in 2002.

Let me briefly comment on revenues for the first six months of 2003. For the six-month period, product revenues of our PEGylated products to our customers grew 54 percent over the same period in 2002. This increase is based on regulatory approvals of new products, including Pegasus and Somavert and higher demand for commercial and clinical shipments of our PEGylation for Amgen's Neulasta and other pipeline products. For the six-month period, contract research revenues were virtually flat compared to the same period in 2002.

Let us now discuss our net loss. We reported a net loss of $13 million or 23 cents per share for the second quarter. The second quarter 2003 net loss compares to $24.8 million, or 45 cents per share, for the same period in 2002. The net loss of $13 million for the second quarter includes a gain of approximately $4.3 million from retirement of $20.5 million of 3.5 percent convertible subordinated notes due October of '07 in exchange for cash payments of approximately $16.2 million in privately negotiated transactions. We reported a net loss of $33 million, or 59 cents per share, for the first six months of 2003 compared to a net loss in the same period in 2002 of $49.9 million, or 90 (ph) cents per share.

Next, our cash balance and cash usage. Before I discuss our cash position, let me touch upon our recent financing. As you are aware, net of issuance costs, during the second quarter, we realize proceeds of approximately $96.4 million in an offering of 3 percent convertible subordinated notes due June, 2010. We used approximately $16.2 million of the proceeds to retire approximately $20.5 million of 3.5 percent convertible notes due October, 2007. We also used an additional $8.8 million of the proceeds to purchase restricted investments pledged (ph) for the benefit of the holders of the 3 percent convertible subordinated notes, which is in the offering.

Now, our cash balance. Our cash balance, which includes cash, cash equivalents and short-term investments, at the end of the quarter, was $308.3 million. In the second quarter, cash used by operating activities was $12.2 million, and investment in property, plant and equipment for the quarter was $3.8 million. This was offset by cash provided by financing activities of $81.8 million.

For the six months ended June 30th, 2003, cash used by operating activities was $52.1 million, and investment in property, plant and equipment for the first six months of the year was $6.1 million. This was offset by cash provided by financing activities of $81.8 million.

I would now like to discuss our guidance for all of 2003. First, revenues. We continue to anticipate revenue growth in 2003 of 5 to 10 percent, with contract research revenue remaining mostly flat, and, product revenues growing by approximately 50 percent in 2003.

Second, net loss. We had previously provided you with 2003 net loss guidance of 97 to $100 million. Adjusted for the gain of $4.3 million from retirement of $20.5 million of debt, this guidance would stand at $93 to $96 million. This implies a net loss per quarter of around $30 million, for the second half of this year. I would like to caution you not to interpret this loss rate as a quarterly net loss rate beyond 2003. Net losses in the second half of this year reflect some timing-related shifts in expenses from first half to second half pertaining to some of our proprietary product programs and increased funding of our contract manufacturers for the Exubera program.

Finally, liquidity and capital resources. With the addition of -- to our cash results of $71.8 million, where the recent convertibles offering in the second quarter, and approximately $9 million through exercise of the issue in July, we now expect to end 2003 with cash, cash equivalents and short-term investments of approximately $260 million.

I would now like to turn the call over to Chris Searcy, who will review our progress this quarter, and our key business segments.

Thank you, Ajay. Let's turn now to review some of the progress we've made with Exubera, our partnered product programs other than Exubera, and our proprietary products program. First, let's look at Exubera.

Pfizer stated at their analyst day meeting in June that they remain confident that Exubera will become an important and widely-used diabetes medication. Pfizer's continuing long-term safety trials to further investigate small differences in pulmonary function test results that were seen between a limited group of Exubera and control patients in early trials. According to Pfizer, comparative pulmonary function test data in Type II Diabetes patients followed for one year in a controlled trial suggests that pulmonary decreases are not progressive and appear to reverse.

In addition, we reported on new Phase III data released by Pfizer and Aventis at the American Diabetes Associated meeting in June that reinforce the benefit of the product. The data suggests that Exubera may provide acceptable glycemic control to significantly more subjects than Rosiglitazone in Type II diabetes patients, not optimally controlled by diet and exercise. Rosiglitazone is an oral hypoglycemic agent used to reduce the body's resistance to the action of insulin as a way of lowering blood glucose. We continue to work to complete the chemistry manufacturing and control sections of the new drug application for facilitate the earliest possible regulatory filing.

Now let's turn to a discussion of the second leg of our business, our partnered products other than Exubera. During the second quarter and the first part of the third quarter, three products using our technology in addition to Exubera made progress. This includes one additional partnered products entering the clinic for the first time for a total of 21 products using Nektar technologies approved or in the clinical pipeline.

First, we are pleased to announce today that in the second quarter, Unimed, a subsidiary of Solvay initiated a Phase I trial of a version of inhaled Granabonol (ph), a synthetic form of a cannabinoid (ph). This is our first application of an inhalation product using a meter-dose inhaler. This product is being developed for potential use in multiple indications. Granabonol is the active ingredient in Unimed's MARINOL capsules that are approved in the U.S. indicated for the treatment of anorexia associated with weight loss in patients with AIDS, and the treatment of refractory, nausea and vomiting associated with cancer chemotherapy.

Second, in June, Celltech announced its CDP 860, trigroided (ph) antibody fragment drug detecting (ph) for cancer completed a small Phase II proof of concept study. According to Celltech, the effect observed in the study confirmed the potent biological activity of this molecule. CDP 860 is one of the three products that are part of a collaboration signed between Celltech and Nektar in October, 2002.

Finally, Chiron Corp. announced on July 23rd that they had initiated a Phase I trial for inhaled Cobramycen (ph). This is Nektar's first application of our pulmonary technology for treatment of lung infection, an applications that we believe has tremendous opportunity. You may recall Nektar also tested inhaled Cobramycen in the clinic a few years ago, but that study is a proof of concept in healthy subjects.

Again, with Exubera, inhaled Granabonol, CDP 860 and inhaled Cobramycen, we had four products showing clinical progress in the second quarter. Our pipeline of products using our technologies continues to grow. I'd like to take a moment to summarize it.

There are now five products using our technology approved for marketing in the U.S.. In addition, there is a sixth product, SprayGel, in Europe that is in clinical trial in the U.S. Of the 16 products in clinical testing including Exubera, four are in late-stage development, four are in Phase II clinical trials, seven products are in Phase I clinical trials, all of which are partnered, and there is one additional product in the pipeline in Phase I, that's a proprietary inhaled molecule that we discussed at last quarter's call.

Let's turn now to a discussion of the third leg of our business, the proprietary products program. The proprietary products program is part of expanded business strategy to first broaden our product pipeline; second, accelerate the development of product; third, enable us to provide our partners with more developed, lower risk products; and finally, increase our percentage of the eventual product sales.

The proprietary product program uses Nektar technologies and/or know-how to create highly differentiated versions of typically already approved molecules. By developing these products through Phase I or II clinical trials, when we do partner them for late-stage clinical development and commercialization, we expect to be able to capture a larger share of their future economic value. We announced last quarter the initiation of a Phase I trial in the U.S. for the inhaled small molecule. We expect that Phase I trial should be complete by the end of 2003. In addition to this inhaled small molecule, we have developed a PEGylated version of inhaled insulin to show how PEGylation could be used sustain action of an inhaled drug. We're encouraged by the pre-clinical data we released at the ADA in June demonstrating that PEGylating insulin, the duration of activity is at least double with a simultaneous increase in bio-availability. Overall, we're pleased with the clinical progress of our products using our technology, and our partnered or proprietary products program during this quarter.

I would like to now turn the call back to Ajit to provide an update on 2003, 2004 milestones and to provide a closing summary for our prepared remarks.

Thanks, Chris. I will now review our milestones in each of our three business segments. First, let's look at Exubera. The next big milestone for Exubera is the filing. As mentioned previously, 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 had funded us to be prepared for the earliest possible filing date, so that when they choose to file, Nektar is not delaying the filing process.

For our other partnered products, we continued to anticipate that Confluent will finish their pivotal (ph) trial this year for SprayGel, and Pfizer approvals either this year or next. And the pivotal (ph) trials for Macugen (ph) 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 additional products approved or awaiting approval by the end of 2004. With respect to our earliest stage partnered product pipeline, Chris already touched upon progress with Solvay's inhaled Granabonol, Chiron's inhaled Cobramycen, and Celltech's cancer drug.

We continue to project that an additional one to two products will enter Phase III by the end of 2004, and an additional one to three products will move to Phase II in the same time frame. Furthermore, as mentioned previously, our partnership dealer pipeline continues to be full, and we anticipate additional partnership deals before the end of 2003. The deal economics of our PEGylation partnership deals done over the last two years and new deals under discussion are better than the economics on deals done early on, including those that cover approved products using our PEGylation technology. These more recent deals are (indiscernible) in the mid-single digits as a percentage of our partners' revenue, or with somewhat lower and somewhat higher.

Finally, for our proprietary product program, we project that we will have one to two additional products besides the inhaled small molecule products discussed on our last conference call, and to the clinic by the end of 2004.

In summary, we've had a very noteworthy quarter. We improved our cash position through the issuance of convertible subordinated notes. We saw pipeline progress on a total of four products using our technology. And Pfizer reported encouraging data on Exubera. Overall, we are pleased with the progress made in the first half of 2003. I will now turn the call over to all of you for questions. Operator, would you please poll for questions?

(CALLER INSTRUCTIONS). Rick Silver (ph) with Lehman Brothers.

Just in light of some of the comments that Novo Nordisk made in the last day on some of the requirements for their inhaled version of insulin -- any implications for Exubera that you're aware of?

Let me have Chris answer this.

Yeah, Rich. The release that was put out talked about needing to look at sort of redesigning the dosage form (ph) fit into the device, I think the strip cartridge, they called it. That was one change. And the other was related to sort of the sterility (ph) requirements that we believe are required for liquid product that would not be required for a dry powder product that we're developing. So we don't see the issues that they raise today influencing in any way the product that we're developing.

This is Rob. The other thing is, we've had to work through a number of issues of improving device and other things over the last two years. And you know, we're in a situation where we're in very good shape there as evidenced by the progress we've made in Phase III. And obviously, I think possible delays for competitors is obviously a positive for us.

Yes, well, of course. I was thinking more from the FDA side. But this clearly looks like it's a case of the liquid and sterility issues associated with liquids.

Those are clearly issues from our -- on our standing that are very specific to their product and their situation, and do not have any effect whatsoever on us.

Lea Hartman (ph) with ERT Capital.

Good afternoon. I have a quick question. One, what was the depreciation expense for the quarter, please? And the second question was, have you repurchased any more of your debts following the quarter's end?

Ajay?

The depreciation expense for the quarter was just under $3 million at $2.9 million, and no, we have not repurchased any more of the outstanding debt following the purchase that we did in conjunction with the convertible offering.

Tom Shinkle (ph) with Imperial (ph) Capital.

Tom Shinkle (ph) with Imperial (ph) Capital: Good afternoon. Congratulations for the progress. I am intrigued by the PEGylated insulin. Could y'all give us a little bit more color as to what it does, what the results have been and what the outlook is?

Sure. The product concept of PEGylating insulin is basically to look at prolonging the circulation half-life of the drug in the body. And the questions that we were looking at is -- can we maintain biological activity once we PEGylate insulin? And what will it do to the bio-availability going across the lawn (ph)? And we presented animal data at the ADA that basically showed that we could more than double the half-life, while increasing the bio-availability. So we've hit the early target program. The potential application of this would be for a longer-acting type of insulin given non-invasively.

I think more broadly is -- I think it was also very important to show that a PEGylated product (indiscernible), is obviously a potential, you know, opportunity for us -- is PEGylating other proteins where you get the advantage -- you know, many of the advantages of PEGylation, lower antibody, you know, formation, less frequent dosing with the advantage of non-invasive delivery of pulmonary root (ph).

Okay.

There's a real nice synergy between our two technologies.

So, one of the things that y'all have alluded to in the past is that you set your dosage several years ago, based on the capability of the insulin that you were working with then; and your whole goal is to improve bio-availability so a smaller dose could do the same job. It sounds like the PEG'ed insulin is on the right track to accomplish that.

The insulin, as Chris mentioned, would have the effect of increasing bio-availability; but it would also be delivered over a much longer period of time. And so, in that sense, it would be a complementary product to the one we are currently developing. We've also, over the years, have worked on ways of improving the bio-availability of our current program -- of our current product -- and we've got a variety of techniques for being able to do that. Those, you know, will also be included (indiscernible) of the up-and-coming product.

So, this new PEGylated insulin would be akin to like Lantis' (ph) to say, (indiscernible)?

Exactly. That's a good analogy. Just to remind you -- this was early stage pre-clinical research.

I understand. But it's a logical extension of what you've been doing in the past?

Exactly.

Yes.

Greg Duvonovich (ph) with CIBC World Markets.

Prior, you had made comments on hopefully obtaining profitability, I believe, in the fourth quarter of 2005. Does that change in any way at all? And then, my second question is -- could you just remind me where we are in the development of the CDP 870 product that was originally partnered with Celltech and Pharmacia and I guess Pfizer now? Thanks.

Ajay, you want to take the profitability portion?

Sure. I think the profitability guidance that we would like to discuss with you is sort of as follows. As you know, we are continuing to -- we and our partners are continuing to make progress with the Exubera program. And at the analysts' day, Pfizer recently stated that they are confident of filing for approval of Exubera. Of course, they have given no guidance with respect to the timing of such filing. And it (ph) disclosed (indiscernible) -- they again disclosed some more long-term safety data, as more of the data is coming about, I am confident in the program is (ph) continuing to increase. So we are currently operating under the assumption that there would be a wider group (ph) of launch before 2006. And based on such launch of Exubera, we are targeting profitability for our business in '06.

Now, for some reason, if Exubera does not file or its regulatory approval is significantly delayed, we can choose to restructure the company, to achieve profitability in '06. And, you know, if we were to sort of shoot for the profitability in '06, we would have to restructure the Company. If that was the best decision, given our Exubera situation opportunities in other parts of our business, and the cash reserves -- and, of course, we will make that evaluation and determination of what to do if and when we get to that stage. So, that's kind of how we are thinking about the timing of profitability.

With respect to CDP 870, the status of CDP 870 -- it is in Phase III, as you are aware. That it went into Phase III late last year. And, other than that, our partners have not provided any further guidance on that program.

Just a quick follow-up. I believe, and I could be wrong on this, I believe the prior comments have been on attaining profitability, independent of Exubera's commercial status. Was that a correct assumption on my part? Or was that not correct?

No, that is absolutely right, that the prior comments had alluded to that. However, within the last one year, we have made, you know, progress with respect to our other programs. We have made problems with respect to our partnered -- with our proprietary programs. And, needless to say, what we are saying at this stage is that when and if the time comes that we have to think about operations of the company, independent of Exubera, then we would have to look at what the status of all those programs is. And based on what the status of those programs is, we will make a judgment and a decision on what's the best course of action for the company. So, at this stage, it is a little bit premature to speculate on what that action is going to be. And, as a result, we will be able to provide further guidance on that if and when that event comes to pass.

At this stage where we are is we are feeling increasingly confident about the Exubera program. The data is looking good as Pfizer announced in their analyst day; and Pfizer continues to fund us significant amounts of money, and they're investing significant amounts of money, in furthering the Exubera program. We're really looking at the business with Exubera. And again, as I stated, if Exubera is widely (ph) known (ph) before '06, we will definitely reach profitability in '06.

I think a simple way to look at it is that perhaps a year or two ago, we looked at -- what would happen if Exubera went away. We'd obviously restructure the business and build ourselves to profitability in 2006. Right now, actually, things are looking very good with Exubera. There are obviously no guarantees; but things are looking very good. And we would expect to turn profitable shortly after the Exubera launch. Obviously, you would have some launch costs associated with Exubera around the time of Exubera. And if for some reason there's a delay, you know, it's obviously if Exubera gets killed for some reason, (indiscernible); if things look well, we're very comfortable with the program, you know, if you restructure at that point -- if it's a few years down the road, you obviously have to look at that point (ph), because you are carrying the launch costs for Exubera, you look at how you handle that. And then real, basically as Ajay said, do what's right accordingly, according to what we think is going on with Exubera at that time. Is that helpful in the answer?

Yes, thank you, very much.

(CALLER INSTRUCTIONS). David Steinberg with Deutsche Bank.

Good afternoon. A couple of questions. First, could you give us an update on alpha-1? And then secondly -- I may have missed this -- but you mentioned that you didn't want to be the gating (ph) item for the filing of Exubera, and there's some internal things you had to do. Could you just repeat what those are? And are those now completed?

On alpha-1, David, that program continues to be on hold, as our partner, Aventis Behring works through -- they were in acquisition discussions previously; they continue to be in those discussions with other parties. And pending resolution of that, the program continues to be on hold. We think this is a terrific program, and these (indiscernible) disappointed, frustrated that the program has been on hold for such an extended period of time. But, I think sort of the business issues need to be resolved by our partner first. Okay?

And second item -- we actually haven't disclosed the specifics of what those activities are that, you know, Pfizer is funding us to get completed so that the filing can be done at the earliest possible time. But, as I said, we haven't sort of disclosed that in any detail in the past.

So, so, do I infer that they're not yet complete?

In one -- yes. I mean, we continue to work on those things. But, we are, for example, things like device, scale up, transfer of technology to Pfizer because they will be doing a lot of the manufacturing themselves. Some of those things, in one sense, are sort of never finished. But those are some -- of the types of things that we continue to work on.

So, then if they wanted to file tomorrow, they couldn't; is that what you're saying?

If they wanted to file tomorrow -- could they not file? Well, I think, from a practical standpoint, they probably couldn't, simply because they'd have, you know, they would have to get the sort of whole NDA pulled together also. And part of what they're waiting on is, you know, I think, when they get the safety data to the point where they are satisfied with that data, and they feel that they can pull together an approvable NDA.

Okay. Thanks.

That's sort of the other part -- you know, that's sort of -- that the filing is contingent on. I think what we're trying to say is at our end, we are just sort of focused on the pieces we need to do; and Pfizer continues to sort of fund us to get those things done, as you know, and completed, to facilitate the earliest possible filing.

(CALLER INSTRUCTIONS). At this time, we have no additional questions.

Thank you, very much, everybody. We appreciate you calling in for this call.

This concludes today's teleconference. Thank you for participating. You may all disconnect at this time.

(CONFERENCE CALL CONCLUDED)