Nektar Therapeutics (NKTR) 2004 Q1 法說會逐字稿

Good afternoon ladies and gentlemen and welcome to Nektar Therapeutics' first quarter earnings conference call. (OPERATOR INSTRUCTIONS) 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 Nektar Therapeutics' analyst conference call to review our performance for the first quarter ended March 31, 2004. I am Ajit Gill, President and CEO of Nektar. Joining me today are our CFO, Ajay Bansal; our Vice President of Corporate Development and Marketing, Chris Searcy; and our Executive Chairman, Rob Chess.

Before we get started I'd like to say that the following presentation contains forward-looking statements that reflect our current views as to the company's business strategy, future products, product developments, 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 and Nektar's reports and other filings with the SEC, including our Annual Report on Form 10-K as amended for the year ended December 31, 2003. Actual events could differ materially from these forward-looking statements.

I would also like to remind you that a Web broadcast of this conference call will be available for replay through May 19, 2004 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 complement information will be made available on the investor relations page at our website as soon as practical after the conclusion of this conference call.

So far we have seen significant progress in 2004. Pfizer and Aventis announced that the European Medicines Evaluation Agency -- or the EMEA -- has accepted the filing of a marketing authorization application for Exubera. We also saw major progress in the rest of our partnered pipeline -- first, Celltech announced encouraging preliminary data from the Phase III trials of CDP870 for rheumatoid arthritis; second, Roche's CERA moved into Phase III trials for renal anemia; also, iTech presented additional Phase III data for its Macugen product for age related macular degeneration and earlier this week also announced data from the Phase II trial for patients with diabetic macular edema; next, Celltech announced that they have initiated Phase I trials for CDP484 for rheumatoid arthritis; finally, we have signed two new license agreements, including one with GlaxoSmithKline and a second one with an unnamed biotechnology company. On the other hand, two of our phase two partner programs, an undisclosed program and Celltech's CDP860, were discontinued by our partners. To summarize our partner pipeline since the beginning of the year, we have had progress on four important late stage programs -- Exubera, CDP870, Macugen and CERA, a new product has entered the clinic, two new license agreements have been signed, and we have discontinued two Phase II programs, neither of which were considered high potential revenue products for Nektar.

Next, we continue to see progress in our proprietary products group. We have completed an initial Phase I trial on a small molecule that confirms the drug's tolerability at and above projected therapeutic dosing levels and have entered the second stage of the Phase I trial to confirm the dosing regimen of the product in humans. We're also conducting a multiple dose study in patients for another product concept.

Finally, we have improved our balance sheet by raising approximately $196 million of cash and reducing our debt from 360 million at the end of 2003 to 174 million as of today. During our prepared remarks today we will discuss this progress further. First, Ajay will review our financial performance; next, Chris will review progress for the Exubera program, our partner products other than Exubera and finally our proprietary products program; following Chris, I will close by reviewing our anticipated milestones for 2004 and 2005; and finally, I will open the call to questions.

Now, I will turn the call over to Ajay to discuss our financial performance.

Thank you, Ajit, and welcome to all of you on the call. Let me briefly review our financial results for the first quarter of 2004, ended March 31st, and then I will follow with our guidance for 2004.

First, let's look at revenues. For the quarter ended March 31, 2004 revenues were 25.8 million compared to 25.5 million in the first quarter of 2003. In the first quarter of 2004 Nektar reported product revenues of 4.3 million compared to 7.1 million in the first quarter of 2003 and contract revenues were 21.5 million in the first quarter of 2004 compared to 18.4 million in the same quarter of 2003. The product revenue decline is due primarily to rescheduling of some PEG product sales from first quarter to later quarters in 2004 as (indiscernible) lower PEG demand for some of the partner marketed products.

Let's now discuss our net loss. For the quarter ended March 31, 2004 we reported a net loss of 40 million or 64 cents per share compared to a net loss in the same quarter in 2003 of 19.9 million or 36 cents per share. Our net loss for the first quarter of 2004 included the following -- loss from operations of 15.1 million; net interest expense of 14.8 million, of which 12.7 million was for payments made in connection with the conversion of convertible subordinated notes; loss from debt extinguishment of 9.3 million; and 0.3 million of other income.

I would now like to turn to our convertible debt transaction in the first quarter ended in April 2004. During the first quarter we exchanged, converted or redeemed approximately 178 million of our 2007 and 2010 convertible subordinated notes. Subsequent to the end of the first quarter on April 22nd, we completed the full redemption of our outstanding convertible subordinated debentures due October 2006. Following all of these transactions, including the April transaction, we now have outstanding convertible subordinated notes in the principal amount of approximately 174 million due in 2007, down from 360 million at the end of 2003. The total number of shares of the company's outstanding common stock is approximately 83.5 million shares.

Next, our cash and cash usage. As you recall, in March Nektar sold 9.5 million shares of common stock at $20.71 per share, resulting in proceeds net of issuance costs of approximately 196 million. Including proceeds from this offering, our cash, cash equivalents and short-term investments totaled 467.4 million at the end of first quarter 2004 compared to 286 million at the end of 2003. In the first quarter cash used by operating activities was 25.4 million and capital expenditures was 7.5 million.

I would now like to discuss our guidance for the full year of 2004.

First, revenues. As mentioned earlier, our first quarter product revenues this year were lower the first quarter product revenues last year. For the full year 2004 we expect our product revenues to be at the same level as last year or somewhat lower. As regards to total revenue, we expect full year 2004 revenues to be between 110 to 120 million. This is toward the lower end of our guidance provided in February.

Second, net loss. We expect a net loss in 2004 of between 100 to 110 million. This is higher by 15 million from our February projection. This change directly reflects the impact of our debt exchanges, debt redemption and equity offering transactions on the fully year net loss number.

Finally, we expect to end the year with approximately 390 to 400 million in cash, cash equivalents and short-term investments.

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

Thank you Ajay.

Let's turn now to review our three business areas -- Exubera, our partnered product programs other than Exubera and our proprietary products program. First, let's look at Exubera.

On March 4th we were very pleased to report that Pfizer and Aventis announced that the European Medicines Evaluation Agency -- EMEA -- has accepted the filing of a marketing authorization application for Exubera. As I'm sure you all know, Nektar developed and provides the inhalers and the powdered insulin for the Exubera product. Pfizer and Aventis are seeking approval to market Exubera for adult patients with Type I and Type II diabetes.

Next, let's discuss our partner products other than Exubera. Today we announced a license agreement with GlaxoSmithKline who will license Nektar Advanced PEGylation for use in the formulation of a pre-clinical protein under investigation as a potential therapy for cancer. Under the agreement Nektar will receive milestone payments and manufacturing revenues during development, and will receive royalties and manufacturing revenues upon successful commercialization of the PEGylation product. In addition, we signed a license agreement with an undisclosed biotech company for an undisclosed pre-clinical product that will use Nektar advanced PEGylation.

In February, we disclosed the existence of a three-year-old collaboration with Roche under which Nektar has licensed a proprietary PEG reagent used in the manufacture of Roche's product CERA, or Continuous Erythropoiesis Receptor Activator. On April 21st as part of the first quarter results announcement, Roche disclosed that CERA has advanced to Phase III trials in Europe and the US for renal anemia.

In March, iTech presented additional data for Macugen from two pivotal trials of more than 1,000 patients who have age-related macular degeneration that suggested that the overall efficacy is independent of lesion size and patient age. Macugen, which has been end-licensed by Pfizer, has been granted fast-track status by the FDA for both age-related macular degeneration in pivotal trials and diabetic macular edema in Phase II trials. In addition, on Monday of this week iTech presented data from their Phase II trial of Macugen that showed positive visual and anatomical outcomes for diabetic macular edema. Diabetic retinopathy is the leading cause of blindness and people less than 50 years of age in developed countries and diabetic macular edema is the leading cause of vision loss in diabetic retinopathy.

Further, Celltech disclosed that reflecting lack of progress in their partnering discussions they have discontinued the development of CDP860, an antibody fragment that used its Nektar advanced PEGylation formerly in Phase II trials for cancer. Good (ph) projected peak revenue potential to Nektar of 10 to 25 million for this product.

Nektar has also dropped from its pipeline an undisclosed product listed in Phase II trials as the company's partners decided not to pursue further development. This was a product with a small biotechnology company, and we had projected it to have peak year revenue potential to Nektar of less than 10 million.

Chiron, who is developing a second generation inhaled tobramycin product using Nektar pulmonary technology, plans to use the commercial product and the commercial device in its upcoming Phase III trials. Chiron anticipates this will delay the start of the trial from the end of 2004 which they had previously guided to the first part of 2005 with minimal anticipated affect on the product launch date.

Additional activity in our partner pipeline came from Celltech. On March 31st Celltech announced the preliminary Phase III data from the 247 patient trial of CDP870, a PEGylated humanized antibody fragment that binds with tumor necrosis factor alpha -- of TNFa -- a key mediator responsible for the inflammation of rheumatoid arthritis. Advanced PEGylation is being used to helped reduce the dosing frequency of the drug. Celltech said that the study met its primary end-point as assessed by the number of patients achieving a 20 percent reduction in the American College of Rheumatology score or ACR20 response, at 24 weeks. Celltech anticipates the second Phase III trials of CDP870 and rheumatoid arthritis will conclude in the third quarter of 2004. Celltech continues to work on Phase III trials of CDP870 in Crohn's disease with regulatory submission in this indication planned for 2005.

On March 16, Celltech also disclosed that they had initiated large placebo-controlled Phase I-II trials in rheumatoid arthritis patients for CDP484, another PEGylated antibody fragment using Nektar Advanced PEGylation. This brings the total of three Celltech products that use Nektar advanced PEGylation now part of Nektar's pipeline, including CDP870 in Phase III trials for rheumatoid arthritis and Crohn's disease, CDP791 in Phase I-II trials for cancer, and CDP484 in Phase I-II trials for rheumatoid arthritis.

Let's turn now to a discussion of the third leg of our business, the proprietary products group. The proprietary products group applies Nektar technologies to develop highly differentiated versions of already approved molecules. By developing these products through Phase I or II clinicals prior to partnering we expect to be able to capture a larger share of the future economic value when we partner them.

We continue to make progress with the proprietary products group. As part of this program, Nektar announced in the first quarter of 2003 that we had initiated a Phase I trial of an undisclosed small molecule. An initial Phase I trial has now been completed that confirms the drug's tolerability at the above projected therapeutic dosing levels. We are now testing this product in a follow on Phase I clinical trial to confirm the dosing regimen of the product in humans.

The proprietary products group is also working towards enabling the filing of Investigational New Drug Applications, or INDs, for additional products by the end of the year as part of the Genzyme alliance. These products include the previously disclosed inhalable leuprolide products, plus another undisclosed small molecule given by inhalation. We believe that all these products, if successful, will represent significant improvements in the treatment of the respective diseases and significant revenue opportunities for Nektar.

In summary, our clinical pipeline across the three revenue drivers -- Exubera, the partner pipeline and our proprietary products -- now includes five products approved in the US; one additional product approved in Europe; one product filed for approval in Europe, being Exubera; five in Phase III or pivotal trials, including Macugen, Exubera in the US, CDP870 for two indications, CERA and SprayGel. Nine products have concluded or are in Phase I trials, with one in Phase II.

I would like to conclude by saying that we continue to be pleased with the progress in clinical development of both our partner product and our proprietary products during the quarter. I'd like now to turn the call back to Ajit to provide an update on '04/'05 milestones and to provide closing summary for our prepared remarks.

I will now review our milestones in each of our three business segments for the next 12 to 18 months.

First, we continue to be optimistic that the Exubera program will make progress. As we have said, any decision with respect to if and when a filing for regulatory approval in the US will be made by Pfizer and Aventis based on their ongoing analysis of data and their discussions with the FDA.

With respect to our other partner product pipeline, we project the following during the next 12 to 18 months. There could be one to two additional products filed for approval using Nektar technology, including iTech’s Macugen for age-related macular degeneration. Itek plans to file for approval of Macugen for age-related macular degeneration in the third quarter of 2004 according to their prospectus filed with the SEC on January 30th. CDP870 for Crohn's disease and/or the SprayGel adhesion system for the prevention of forced (ph) surgical adhesions. With the possibility of Chiron’s tobramycin moving into Phase III early next year, Nektar could have a total of six products filed or in Phase III or pivotal trials by the end of 2005 and we have a rich pipeline of eight other Phase I products, some of which we would expect to move into Phase II.

Furthermore, as evidenced by the two new deals we announced today, we continue to see interest in our technology platforms from major pharmaceutical and biotechnology companies, and we anticipate additional partnership deals during 2004. As such, the next 12 to 18 months promise to be very fruitful ones.

Before I turn the call over to you for your questions, let me recap the first four months of 2004, which have been very productive.

Pfizer and Aventis filed for marketing authorization application for Exubera in Europe. An initial Phase I trial of an inhaled small molecule from our proprietary products group has been completed and we're advancing the product. We've seen encouraging data from two of our late stage products, CDP870 and Macugen. CERA, our partnered program with Roche, has moved into Phase III trials for renal anemia. We signed two additional licensing agreements. And we strengthen significantly our balance sheet. We're looking forward to a promising remainder of 2004.

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

(OPERATOR INSTRUCTIONS) Ian Sanderson, SG Cowen.

Good afternoon and thanks for taking the question. First, and you may not be able to answer this question, but in the Exubera -- the two-year safety study that's still ongoing in Type I diabetics, and also looking at the Type IIs, do you know if the control arm of subcutaneous insulin injections used standard insulin or fast acting insulin? That's question one. Question two is what new data should we expect to see on Exubera at the ADA meetings, if any? And then third, if you could just give some further color on the decline in the PEG supply sales in the quarter and whether that should be an anomaly or onetime event.

Let me have Chris answer the first two parts of the question. And then Ajay, if you would take the one on product sales please?

In terms of the protocol that Pfizer is using in the two-year study in Type I diabetics, the details of that to our knowledge have not been disclosed in terms of what the comparative agents that they're using in particular.

In terms of more data and when might we expect to see some clarity or some insight into that, I think on the ADA web site it talks about publishing abstracts around the middle of this month. So I would check the ADA web site to see what data will actually be presented at the American Diabetes Association meeting in June.

I think in the past Pfizer has presented data at several of the last ADAs, so I think it is possible they might present some data this time. But I think by the middle of the month that will become known.

With respect to the PEG product revenues, as we stated in the call and in the press release as well, the majority of the product revenue decline in the first quarter compared to the first quarter of last year was due to rescheduling of some of the product sales from the first quarter to later quarters in this year. And some of the decline was due to lower PEG demand for some of our partner marketed products. As such, and expecting that our full year revenues would be similar to full year revenues of last year or somewhat lower. You might recall that our full year revenues on PEG products last year were about $27 million.

Just the lower PEG demand, can you just give a little bit of backdrop on what might be causing that?

Well, two things. I think as you know, we have five marketed products in the US; we have Definity from Bristol-Myers Squibb, Somavert from Pfizer, PEG-Intron from Schering-Plough, Pegasys from Roche and Neulasta from Amgen. So for some of these products the sales levels are projected to be lower than what they were last year, and those are impacting our PEG sales as well. And for some of these products, the marketed products, some of the PEG sales we made last year were attributable to things which did not have to do with their sales in the market, such as validation of new facilities, such as initial bolus (ph) of inventory, such as doing clinical trials and other indications. And the revenues that we generated from serving those needs for our partners last year would be lower this year because those needs have been met. So those factors combined together lead us to believe that our full-year revenues would be more or less in line with revenues last year or maybe somewhat lower than revenues last year.

Thank you very much.

Lauren Bloomberg (ph), Bloomberg Capitol.

I guess an expansion of Ian's question. What was your response -- if you have a response -- to the recent clinical data that Aradigm and Novo Nordisk reported with their liquid inhale product with insulin?

We were a little bit surprised to read the information. Pfizer has done extensive testing in Type I and Type II diabetes and has filed for Type I and Type II diabetes. And to our knowledge we have not seen any data like Aradigm had announced earlier this week in terms of its effect versus fast acting subcu insulin. So I think it was a bit of a surprise.

Remind me what your balance sheet looked like at the end of the quarter?

At the end of the quarter balance sheet was (indiscernible) cash. As we note in the press release, we had cash of about $467 million and our convertible subordinated note that are all due in '07 were down to $174 million.

Thank you very much.

Just on (indiscernible) on the insulin related question, I think it's worth pointing out that we have had patients, diabetics, both Type I and Type II, who have been Exubera now for many, many years, some going as far back as six years on the product, and a much, much larger number that have been on it for three to four years.

Rich Silver, Lehman Brothers.

Actually my question has been answered. Thank you.

David Wallace, Value Capital Management.

My question relates to the study that Pfizer and Aventis has done regarding your diabetic program. My question relates to do you know if they studied specifically the effectiveness with regard to Exubera at both intra-day and for nighttime glucoses control in Type I and Type II? And if so, do you know what they found?

The general answer to that is, Pfizer has looked at sort of reproducibility within patients in a number of studies and feel confident that it is as or better than subcu injected insulin. They have also done extensive trials, both Phase I, Phase II and Phase III, looking at a number of different scenarios in terms of comparative agents, be it to orals, be it to injectable, in different types of protocols. Some of that information, the specifics are available by looking at some of abstracts that have been presented at scientific meetings, and I suggest that you contact Pfizer to get that information. I think a lot of that data has not been presented and a lot of that data currently resides inside the large database that they are putting together and have put together to support the filing for the program.

But they have looked at it extensively, both in normal volunteers and diabetic patients looking at reproducibility and effect over time, but from an efficacy and safety standpoint. I think the fact that we now have an acceptance of a filing in Europe, sort of -- it leases (ph) a milestone suggesting they believe the product is safe and effective enough that they filed the dossier for approval.

One final question. Do you happen to know in the two primary Phase III trials what percent of the patients were Type I?

No I don't think that data has been disclosed.

Okay, thank you. That's all I have in.

Harry Zimbazavm (ph), Merrill Lynch.

Just two quick questions. One is on the status of manufacturing. I am just wondering whether you have an update as to how that plant in Germany, which was I guess at some point in time had been producing Lantus, where it is in terms of Exubera production at this point in time. Has it been fully converted or is it in the process? And if you can maybe give us a bit of color on that. Secondly, with the EMEA filing, are there certain costs that -- I'm just wondering about your SG&A spend or your R&D expenditure spend that might change as a result or materially change as a result of the EMEA filing?

The first part, as far as the plant in Frankfurt is concerned, I think for any sort of an update on that you'd really have to ask Pfizer or Aventis actually for that. It's not something we are in a position to sort of discuss.

As far as the EMEA filing causing any additional costs at our end, noting that that has not already been factored in I think at this point. If you go back to our business model, any costs we would incur on something like that would be reimbursed by Pfizer.

Actually I guess the question I wanted to ask was whether there's been any reduction at this point in time in any costs and whether your current SG&A spend should be lower for the year. Or are you expecting to basically continue at the current sort of a trend-line at this point in time?

SG&A expense, as you would note from the press release as well, is relatively moderate. And any of the (technical difficulty) I guess your question is more relating to the R&D expense.

Yes.

Right. And as we have guided in the past, are R&D expenses, besides some of the reduction in expenses relating to Exubera, are staying relatively constant to increasing some and that is primarily because we're investing more of our money for our proprietary products. So as a result of expenses coming down on Exubera, what will happen to the total R&D expenses will depend on how much incrementally more we continue to spend on our proprietary program. And for the year I would just provide the guidance, as I said earlier, for the total loss (ph) guidance of 100 to 110 million. And that, again, as I mentioned, is 15 million more than what we guided to you in February relating to the debt conversion redemption and equity transactions we did earlier this year.

Thank you.

Pershant Indumdar (ph), Shark Investments.

Can you talk about the economics on the Macugen drug for you? Do you get royalties on sales or --?

What we have guided in the past is that the net revenues to us from the Macugen product are going to be in the mid single digits, and they're a combination of manufacturing, as well as royalty revenues. We have further guided that based on what we estimate and what we have heard about the potential of the product, we expect peak annual revenues to us to be in the range of 25 to $50 million.

Thank you.

Ammon Adams, CRT Capital Group.

Quick question. If you were to exclude the 9.3 million loss on debt extinguishment and the $10 million (indiscernible) premium from Q1 it looks like the run rate is about $100 million loss on the year. So is it safe to assume that you have not budgeted any additional debt reduction?

The launch guidance we are providing is excluding anything that might happen on the front. We remain very opportunistic in our accruals (ph) and we keep looking at opportunities to further strengthen our balance sheet. So as the right opportunities present ourselves, then we might undertake another debt reduction activity and that may influence the loss number that we have guided towards. So you should not conclude that we may not do anything, but you should conclude that the number that we're guiding excludes any follow up losses we may have from any additional debt reduction or restructuring activity.

Thank you.

(OPERATOR INSTRUCTIONS) There are no further questions. Are there any concluding comments?

I would just like to thank everybody for attending this conference call. And with that I think we will end. Thanks. Bye bye.

Thanks for participating in today's teleconference. You may all disconnect at this time.