Nektar Therapeutics (NKTR) 2003 Q3 法說會逐字稿

Good afternoon, ladies and gentlemen, and welcome to the Nektar fourth quarter results conference call. At this time all participants are in a listen-only mode. Later we will conduct a question and answer session. Please note that this conference is being recorded.

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, operator. Welcome to the Nektar Therapeutic analysts conference call to review our third quarter 2003 results. I'm Ajit Gill, President and CEO of Nektar Therapeutics formerly known as Inhaled Therapeutics Systems. Joining me today are our Chairman, Rob Chess, our CFO Ajay Bansal, our VP of Corporate Development, Chris Searcy and Milton Harris, head of our [INAUDIBLE] unit, formerly known as Sheer Water.

Before we get started I would like review our Safe Harbor statement. The following presentation contains forward-looking statements that reflect our current views as to the Company's balance sheet, future product, product development, funding, clinical trials, manufacturers scale up and other future events of operation 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 end the December 31st, 2002 as amended and our quarterly report on Form 10(Q) for the fiscal quarter ended June 30th, 2003. Actual events could differ materially from these forward-looking statements.

I would also like to remind you that the webcast of this conference call will be available for replay through November 20th, 2003, on the Investor Relations page at Nektar's web site at www.nektar.com. In the event that any NonGAAP financial measures are discussed on this conference call that is not described in our earnings release, related complimentary information will be made available on the Investor Relations page at our web site as soon as practical after the conclusion of this conference call.

Today we will review our performance for the third quarter and the first nine-month of 2003. First Ajay will review our financial results. 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'll close by reviewing our anticipated milestone for 2003 and 2004. 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 third quarter and for the first nine months of 2003. We reported total revenues for the third quarter of $27.4 million with quarter revenues of $23.2 million for the third quarter of 2002. In 2003, product revenues were $7.7 million versus $4.4 million in 2002. And contract resource revenues totaled $19.6 million versus $18.8 million in 2002. For the first nine months of 2003, we reported total revenues of $80.6 million versus revenues of $72.2 million in the same period in 2002. For the first nine months of 2003, product revenues were $21.4 million versus $13.3 million in 2002. And contract research revenues totalled $59.2 million in 2003 versus $58.9 million in 2002.

Let me briefly comment on revenue for the first nine months of 2003. For the nine-month period revenue for [INAUDIBLE] product grew 61% over the same period in 2002. For the nine-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 $17.2 million, or 31 cents per share for the third quarter of 2003 compared to $26.5 million, or 48 cents per share for the same period in 2002. We reported a net loss of $50.2 million, or 19 cents per share, for the first nine months of 2003 compared to a net loss in the same period in 2002 of $76.4 million, or $1.28 cents per share. Our low net loss for the nine months of 2003 compared to 2002 is largely driven by lower operating expenses and increased gross margins from sales of our [INAUDIBLE] products.

Next, our cash balance and cash usage. Our cash balance which includes cash, cash equivalent and short term investments at the end of the quarter was $304 million, approximately. In the third quarter cash used by operating activities was $11.7 million, and investment in property, plant and equipment was $4.9 million for a total of cash usage of $16.6 million. This was offset by cash generated by financing activities of $12.5 million for a net cash usage of $4.1 million for the third quarter. For the nine months ended September 30th, 2003, cash use by operating activity was $64 million and investment in property, plant and equipment was $10.9 million. This was offset by cash generated by financing activities of $85.2 million, for a net cash increase for the first nine months of the year of $10.2 million.

In October, 2003, subsequent to the close of the third quarter in a limited number of privately negotiated transactions, certain holders of Nektar's outstanding 3.5% convertible subordinated notes due October 2007, exchanged and cancelled $87.9 million in aggregate principal amount of the 3.5% note for the issuance of $59.3 million in aggregate principal amount of newly issued 3% convertible subordinated notes due June, 2010. This transaction, these transactions result in a gain of approximately $27 million in the fourth quarter. The newly issued notes are convertible into shares of the Company's common stock and issued at a price of $11.35. The newly issued notes are redeemable and are consistent with the redemption provision of the 3% convertible notes issued in June, 2003. As with the [INAUDIBLE] convertible notes issued in June, 2003, the restricted investment equal to initial six payments of interest have been purchased and pledged for the benefit of the holders of the newly issued notes. The results of these transactions in October is that we have reduced our total convertible debt load from $388.6 million as of the end of September 2003, to $360 million today.

Also important to note due to all transactions this year our debt due in 2006, 2007 was reduced by a total of $108.4 million to $190.7 million. This is a total of $299 million at the beginning of the year. Of this $190.7 million debt due in 2006, 2007, $7.8 million is due in 2006, and $182.9 million the is due in 2007. We plan to continue to work to improve our business stragegy.

I would now like to discuss our guidance for all of 2003. Before I begin let me say that we will provide specific guidance for next year at our 2003 year end conference call in February.

First revenues. We continue to anticipate revenue growth in 2003 of five to 10% with contract research revenues remaining mostly flat and product revenues growing by approximately 50% in 2003.

Second, net loss. We except a 2003 net loss between 50 to 55 million. This loss guidance includes gains of approximately $31 million from debt related transactions. You will recall that in the second quarter we recorded a gain of $4.3 million. We additionally expect to record a gain of approximately $27 million as a result of a convertible debt transaction completed in October, for a total gain from debt related transaction of approximately $31 million. This total net loss guidance of $50 to $55 million compared to the beginning of the year guidance of $97 to $100 million is the net result of the previously mentioned $31 million securities related gain and reduced spending of more than $10 million. Primarily related to our proprietary product program from 2003 to 2004. A discussion of net loss due, note that the $27 million securities transaction related gains that we expect to incur in the fourth quarter would likely result in a fourth quarter 2003 net loss being close to break even.

Finally liquidity and capital resources. We now expect to end the year with cash, cash equivalent and short term investment of approximately $275 to $280 million.

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

Thanks, Ajay. I will talk about Exubera, our product programs other than Exubera and our proprietary products program.

First, let's look at Exubera. We continue to be confident in the future of Exubera. As you are aware our partner, Phizer and Aventis Pharma are continuing to conduct advanced late phase data for Exubera Funding by Phizer for the Exubera program is continuing at a high level. Our efforts at Necktar are focused on CMC activities necessary for filing, approval and eventual launch of Exubera. As you would expect, Exubera remains a major priority for our company. While we are optimistic for the are prospects for the product, as we have said in the past the determination as to the filing and launch timing will be made by Phizer and Aventis.

Next, let's discuss our partner products other than Exubera. During the quarter Celltech announced that CP791 drug that uses CP PEGylation technology and services entered Phase I trials for cancer. As you probably are aware CP 791 is one of the four products from Celltech that using our PEGylation technology. CDP 870 now partners with Phizer for rheumatoid arthritis is in Phase III development as a therapy for rheumatoid arthritis. In addition, Celltech is testing CP 870 for Chron's Disease, which causes inflammation in the intestines and affects approximately half a million Americans. Celltech recently presented two Phase II studies of CDP 870 for Chron's Disease at the 2003 [INAUDIBLE] diease week meeting. CDP 870 is a PEGylated humanized anti-TNF alpha antibody fragment. As a result of this encouraging Phase II data, Celltech has continued work with an alternative Chron's Disease product, not one by the way that uses our technology to focus on CDP 870.

Another Celltech product, CDP 860 a pegylated antibody fragment drug also in testing for cancer, completed a small Phase II proof of concept study last quarter. The fourth product is CDP 484, a pegylated antibody fragment for rheumatoid arthritis that could enter the clinic this year.

We disclose today that Nektar and Aventis Behring intend to Inhaled Alpha-1 Proteinase Inhibitor being developed by the two companies in an inherited form of emphysema with alpha-1 antitrypsin deficiency. We were pleased with the technical progress of the product that included results from a Phase 1 clinical trial announced by the two companies in April of 2001 in which all doses were well tolerated and the dose response was achieved. We believe that inhaled version of Alpha-1 Proteinase Inhibitor is an important product for the Alpha One community. We expect to retain the rights to develop Inhaled Alpha One and intend to seek a new partner. As you know the program has been delayed over the last few years and we are pleased that we will now have the opportunity to find a partner that can carry it forward in a more expeditious manner.

Also Trial One, not for strategic marketing reasons, and not because of any technical difficulties, has decided to discontinue development of an inhaled clinical product. A proprietary product called PA 2794 previously announced in June 2002 as part of a multi product collaboration. We continue to work with Trial One in the development of Inhaled Tobramycin, formulated for the treatment of pseudomonas aeruginosa in cystic fibrosis, which is in Phase I clinical trial.

In summary, in the quarter, an additional product CDP 791 entered the clinic for a total of 21 products that use our technology either in the clinic or approved. Second, Nektar and Aventis Behring intend to terminate the Alpha-1 collaboration between the two companies and Nektar is expected to retain rights of the product and is optimistic about its prospects. And third, work on inhaled pulmonary product has stopped.

Looking back over the first nine months of 2003, progress in our clinical partner pipeline have been substantial. During the first nine months of 2003 the fifth product using our technology, Phizer Somavert was approved by the FDA, positive Exubera data was released, three products entered the clinic and the fourth entered an advanced phase trial. One CDP 860 is in the phase II A trial, the proprietary products program.

Let's turn now to a third area of our business, the proprietary products program. The proprietary products program generally uses Nektar technology and their know how to create highly differentiated version of already approved molecule. By developing these products through Phase I or II clinical trials we expect to be able to capture a larger share of the future economic value when we partner them. We have expanded our capabilities in the proprietary products group to include specialized clinical science and regulatory expertise to enable selection and development of product opportunities. As we discussed in our first quarter conference call we are testing inhaled product in phase I trials which are ongoing. At the same time we continue to evaluate our partnering investment options for this program.

Our critical pipeline across three revenue drivers, Exubera, the partner pipeline and our proprietary product now include five products approved in the U.S., one additional product approved in Europe, four including Macugen and Exubera are in late stage development, four are in Phase II clinical trials, products excluding Alpha One are concluded or in Phase I of clinical trials. All in all we are pleased with the trials in the clinical development of both our partner products and the proprietary products during the quarter.

I'd like to now turn the call back to any yet to provide update on 2003 and 2004 milestones and to provide a closing summary for our prepared remarks.

Thanks. Chris meant to say when he was discussing CDP 870 that due to the encouraging phase II data on CDP 870 Celltech has discontinued work on an alternative Chron's Disease product, not one that uses our technology, in order to focus on CDP 870 development.

I will now review our milestones in each of our three business segments over the next 12 to 18 months. First we continue to be optimistic that the Exubera program will progress. As we have said any decision with respect to when or whether the filing for regulatory approval is made will be made by Phizer and Aventis based on their ongoing analysis of data and regulatory discussion. For our other partner products we continue to anticipate that Eyetech will disclose data from the pivotal trials from Macugen for call large generation plans to conduct additional trials in 2004 for SprayGel based on added needs for U.S. versus European trials which could delay that filing in the U.S. As you know this product is approved in Europe.

We have no update on CDP 870 for rheumatoid arthritis other than what Phizer reported on their financial results conference call last month. That is too early to assess the data. CDP 870 for rheumatoid arthritis is in phase III clinical trials that were initiated at the end of last year. With regards to CDP 870 for Chron's Disease, Celltech has said that they plan to enter Phase III trials in the second half of 2003. With respect to our earlier stage product pipeline we continue to project an additional one to two products will enter Phase III by the ends of 2004 and an additional one to three products will move to Phase II in the same frame.

Furthermore, we continue to see interest in our technology platforms from major pharmaceutical and bio tech companies and we anticipate additional partnership deals before the end of 2004. As such between now and the end of next year we have wonderful milestones to look forward to.

Taking a brief look back we are pleased with the progress in the first nine months of 2003. First hour product revenues continue to grow and we are on target to achieve revenue growth of five to 10% in total in 2003. Next, our partners continue to advance products using our technology in the pipeline and finally we are pleased with the improvement in our balance sheet as a result of our convertible transaction.

I will now turn the call over to all of you for questions. Operator, would you please poll for questions?

Yes, thank you. We will now begin the question and answer session. [Caller Instructions]. Our first question comes from Richard Silver with Lehman Brothers.

On Alpha One, can you give us some sense of what the timing might be on finding an alternative partner and from what you know right now what trials might have to be repeated or do you envision just picking up where you and Aventis or I should say Aventis Behring left off.

It's a little early to make any projections on when we might find another partner given that we are working through the final stages with the termination with Aventis Behring. And the sales cycle of these types of projects can be quite long. Depending on which partner we sign and the source of the product that will play a big part in determining exactly what the clinical program will be in the future development. Of course we ought to have a significant advantage given all that we've learned on working in formulating this molecule and conducting a variety of chemical trials on this product.

Okay. Thank you.

The next question comes from Ian Sanderson from SG Cowen. Please go ahead.

Thank you and good afternoon. Also on Alpha One, as I recall one of the hang ups on this was the uncertainty about figuring out what a good clinical end point would be and validating that with the FDA. Could you tell us weather that in fact has occurred or has been resolved and secondly, on CDP 870 there have been some rumblings of formulation problems in the market. Is there anything you can tells from your side about the formulation there?

Chris?

The first question in terms of the clinical end point for moving that product forward, there have been over the period since we've been working on the program a number of discussions both internally and also some discussions with regulatory authorities and about all we can tell you right now is we do believe there is a path forward in terms of looking at how we would develop this. Obviously certain paths have different risk profiles but we do believe there is a path forward but I can't get into any more detail on that.

On your second question on CP 870 in terms of formulation issues that I won't comment on, I refer you to Phizer to answer that question.

Anything else been done on inhaled [INAUDIBLE].

We continue to develop that program. We did the original proof of concept and we believe we will be making progress on that molecule but we don't have any specific update on that today.

Our next question comes from [Terry Nussbaum] from Merrill Lynch.

Question has been answered.

[Lawrence Bloomberg] from Bloomberg capital. Please go ahead.

Thanks for putting me on the call. Can you give us some update about your business relationship on the Roche, excuse me, can you tell us about your business relationship with your pegylated portfolio with Roche? Do we know anything about the royalty level? I assume you are getting a royalty considering what's in the patent.

Yes, there's been notice in terms of a program with Roche. I can't comment.

I'm sorry, you can't comment at all on whether you have, they are using your technology on that drug?

Yeah, there's been no disclosure on that program and whether we are working with Roche on that molecule.

But they reference Share Water in the patent.

All I know in the public domain there's no announcement of us working on that program with Roche.

Okay. Thank you.

Our next question comes from David Steinberg from Deutsche Banc. Please go ahead.

Hi. A couple questions. First on the product and royalty line it looks like a pretty healthy increase. Can you talk about which partner products drove the incremental 75% growth year over year? And then secondly on Alpha One isn't one of the problems that there aren't many companies that actually supply this product that's constrained in the marketplace and so without Aventis Behring who else could you dough go to? And thirdly could you remind us of the rough royalty rate you get on Macugen?

I will have Ajay answer the first part and Chris you take the second part and Ajay you take the last part.

With respect to the top line growth on the product sales as you know [INAUDIBLE] was approved earlier in the year and as you are aware a number of the products in the market that are using our PEGylation technologies such as Neulasta, PEGASYS and PEG-INTRON are all growing nicely. It's a combination of all those products, some increased say sales products that are in the clinical trials that are resulting in a pretty healthy growth in the peg product sales. For Macugen the total economics that we expect from royalties in manufacturing are in mid single digits and Chris the question to you about Alpha One sourcing.

Like many of the proteins in the market just happens to be a blood protein that we are working on with Aventis Behring are difficult to source and that's always an issue with these programs. However since we first started a the program a number of years ago, there's actually some alternative sources in the market. We won't go into any detail but there's less dried as well as recomp sources of Alpha One that are potentially available for development and as we work through our strategy for repartnering that we can shed some more like light on what that strategy is.

As Ajay pointed out a portion of that sample to Enzon is part of our agreement with them.

Finally on Alpha One, hasn't another company moved ahead of you now, you've sort of been in the muck for a couple of years while Aventis got their act together. Isn't another or maybe two companies moved ahead of you now and will that possibly determine where you move forward?

Yes there has been some progress on that front. I think there's virtually enough [inaudible] that they were looking at delivering Alpha one by a number higher and that program I think was recently announced in the last couple of weeks. We don't have any intelligence on that and there's also a company with a source of recombinant on that but I don't have any specific update on where they are in terms of a development program. We've completed a Phase I B and feel like we've got a good formulation and have the ability to move that program forward if we can find the right partner to do that.

Thanks, guys.

Once again for any questions please press star one on your touch tone phone. At this time we have no additional questions. Do you have any closing comments?

With that we would thank all of you for taking the time to attend the conference call. Some of us are traveling but if you have any other questions later on feel free to call Joyce Strand at Nektar and she'll make sure that we get answers back to you. Thank you very much.

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