Nektar Therapeutics (NKTR) 2004 Q2 法說會逐字稿

Good day, all sites are on the conference phone. At this time, I'll turn the meeting over to your moderator. Ms. Shaw, go ahead, ma'am.

Thank you, operator. Good afternoon, ladies and gentlemen. Thank you for joining Aerogen's second quarter 2004 conference call.

My name is Dr. Jane Shaw. I'm Chairman and Chief Executive Officer of Aerogen; and with me here today is Robert Breuil, our Chief Financial Officer and Vice President of Corporate Development. The press release speaking to Aerogen's second quarter financial results was released earlier today, and can be retrieved at www.aerogen.com on PR NewsWire or on First Call. There will be an audio replay of this conference call accessible on our website in the investor relations section through August 17th.

Now, the matters we will be discussing today will include forward-looking statements, and as such are subject to various risks and uncertainties. Our actual results may differ materially from those matters discussed today. We discuss in detail important risk factors that could cause actual results to differ from those contained in any forward-looking statements in our Form 10-Q, which was filed for the fiscal year ended December the 31, 2003, filed with the SEC on April the14, 2004, and in our most recent F3, to which an amendment was filed on July the 26th, 2004.

I'll now provide a brief review of our corporate status and recent progress. Earlier this year, we were successful in completing a significant round of financing for the corporation. We raised approximately $31 million in net proceeds, funds that are sufficient to support execution of our business plan well into 2006. We were fortunate during the lengthier time that we required to secure this financing that the core Aerogen team stayed together and continued to execute our business plan.

Aerogen has a solid and focused business plan. Our mission is to be a leading specialty pharmaceutical company providing novel drug products for treatment for critically ill patients with respiratory disease, particularly those in the intensive care units of hospitals who require assisted breathing biomechanical ventilator. We've been steadily executing on this plan, and we've made some great accomplishments during this past quarter. I'll divide my comments into six different sections.

First, I'll describe the market. Secondly, our pharmaceutical products. Thirdly, I'll give you a brief update on where we stand with devices. Fourthly, I'll touch on the consumer products we mentioned in our press release today. Fifth, I'll give an update as to where we are on inhaled insulin activities; and lastly, I'll touch on our IP. So first, I would like to describe the market we are addressing with our portfolio of pharmaceutical end device products, which all incorporate our propriety OnQ aerosol generator technology.

There are approximately 6,000 hospitals in the United States, and 8.000 intensive care units. It's estimated that in the United States in 2002, the intensive care units consumed some $74 billion in hospital costs. In 2002, the average cost per patient per day in an intensive care unit was greater than $3.5 thousand. Respiratory conditions were associated with approximately one-third of all days spent in the ICU, and more than one million patients per year required mechanical ventilation.

Respiratory disorders treated in the intensive care units include pneumonia, chronic obstructive pulmonary disease, inflammatory conditions of the lungs, and respiratory conditions in the newborn, including infant respiratory distress syndrome. Of the patients placed on a ventilator for more than one to two days, 20 to 25% contract pneumonia, which adds approximately $40,000 to the cost of treatment. Despite aggressive intravenous therapy with antibiotics, on the order of 20% of patients who contract ventilator-associated pneumonia die.

Except for treatment of airways disease, almost all drug therapy for treatment of respiratory conditions in the intensive care unit is administered intravenously. Our cost structure in administrating really high concentrations is in an attempt to ensure that adequate amounts of drug partition from the bloodstream, into the lung to reach the site of the disorder. The limited efficiency and effectiveness of traditional [INAUDIBLE] nebulizers and MDI's [PHONETIC] used in this study has limited the pulmonary routes as a viable option for drug delivery for treatment of severe respiratory disease.

The common aerosol delivery systems for the ventilated patients deliver less than 10% of the dose to the lungs of the patient. We believe we've identified a market opportunity that takes full advantages of the peaches of our proprietary technology, for which we are now developing a unique line of pharmaceutical products. Aerogen's proprietary pharmaceutical problems, which are drug device combination products, use our high-efficiency, pulmonary drug delivery system, or we abbreviate it often to be the PDDS.

We use this system to provide delivery of aerosol [INAUDIBLE] to the lungs of ventilated patients.The products all incorporate our OnQ aerosol generator, which generates the appropriate aerosol particle size for the selected drug, can be placed ultimately in the ventilator circuit and can reduce aerosol in synchrony with the [INAUDIBLE] recycle of the ventilator.

Our pharmaceutical products are targeted to deliver greater than 70% of the dose to the lungs of ventilated patients. Providing some 7 to 8 fold increase in efficiency in the dose delivered over currently available nebulizers. Each such drug device combination product will require submission of an MDA or a BLA. And we are currently evaluating aerosol delivery of novel drugs that are new to ventilation. So let's talk for a moment about our pharmaceutical products.

Our lead pharmaceutical product is aerosolized amikacin, for treatment of ventilator-associated pneumonia. We chose aerosolized amikacin, purchase in the [INAUDIBLE] with broad spectrum coverage, effective against the gram negative organisms, common in VAP. We have completed the first Phase 2 study in Paris, France and the results were reported at the American [INAUDIBLE] Society meeting in Orlando last May.

The results indicated that we could deliver aerosolized amikacin to the lungs of ventilated patients with a high level of efficiency that correlated well with our invitro results. We've been in dialogue with the FDA as to the preclinical program that will be required for U.S. registration of this product. We are currently conducting the required toxicology studies in two animal species. We secure the supply of the drug.

We are nearing the completion of the device component of the product, and with these data in hand, we are on plan to file with the USIND and initiate a multi-censored efficacy study prior to year end. We are guided in this program by an external board of advisors within their extensive medical, clinical and regulatory experience to [INAUDIBLE] on our program. Other opportunities we're evaluating for treatment of respiratory disorders in the intensive care unit include delivery of pulmonary vapor activators, surfactants and inflammatory drugs and bronchodilators. We plan to have our second drug for treatment of patients in the ICU in Phase 2 before the end of the year and we look forward to keeping you updated as to our progress.

Our plans are to promotionalize these pharmaceutical products ourselves in the United States and partner outside the United States. Let's turn now to our devices. As we move our pharmaceutical products forward, we also remain focused on support of the Aeroneb professional nebulizer, abbreviated to be called the Aeroneb Pro, in the hospital setting. The Aeroneb Pro is approved as a multi-patient use, ultra favorable, general purpose nebulizer for delivery of general [INAUDIBLE] nebulizer solutions, such as Albuterol and [INAUDIBLE].

For this [INAUDIBLE] product, we target aerosol delivery to patients on ventilators with an efficiency in the range of 12 to 15% for adults. We distribute this device principally through ventilator manufacturers, who both sell the product with their new ventilators and also target their in-store base. This quarter, we've renewed our worldwide distribution agreement with Puritan Bennett and we have also signed a similar agreement with [INAUDIBLE].

[INAUDIBLE] is formerly [INAUDIBLE] with Seiments. Together, we estimate these two companies account for approximately 58% of the 170,000 ICU ventilators installed worldwide. And they account for over 60% of the 8,000 new ventilators sold into ICU's worldwide each year. Our agreement with Daytex O'meter [PHONETIC], which was announced in May 2003, proceeds on track. Daytex O'meta now calls for general electric medical systems. This agreement calls for the incorporation of the aeroneb pro-control module, which drives the nebulizer as a standard option in their critical care equipment, thereby enabling their equipment to drive the nebulizer when aerosol therapy is provided.

This provides greater convenience and cost effectiveness for clinicians and their patients. Our device development team, located in [INAUDIBLE] Ireland, continues to explore and develop new device for opportunity. One additional device released the sale this past quarter is the aeroneb lab. This is a nebulizer designed for preclinical and laboratory use. This product is targeted for use by contract research organizations ,and also for use in academic and industry research.

For the whole nebulizer market, we developed the Aeroneb Go, product which was introduced into the U.S. market by a distributor, Medical Industries America in the first quarter of 2004. The product, approved by the five 510-K [INAUDIBLE] general purpose nebulizer is lightweight, simple to use and it provides rapid treatment times. It has been well accepted in the marketplace and we anticipate introduction and other countries outside the United States in the second half of 2004.

Under our agreement with MIA, we supply them with the core aerosol generator at the fixed price. They assemble and distribute the product and they pay Aerogen a royalty on their sales. For 2004, we anticipate revenues from product sales of Aeroneb Pro and Aeroneb Lab in the $3.5 to $4 million range, and for Aeroneb Go, we expect to record of roughly $1.5 to 2 million on lower margin component sales from the Aerosol generators, or MIA, and .5 to 1 million in royalties on MIA sales.

We will also continue to book half a million each year in amortization in the up front payments made by MIA when we sign the agreement. The OnQ aerosol generated technology, incorporated in both our devices and [INAUDIBLE] products is manufactured in our world class manufacturing facility located in Mountain View, California. In response to MIA's requirements for the Aeroneb Go home nebulizers, we successfully scaled up aerosol generator production, and we demonstrated our ability to produce up to 4,000 aerosol generators per week.

This scale of activity has led to improved yields and reduced costs, which benefits accrue to all of our products. Let me talk briefly about the consumer product. We were pleased to announce in our press release today that the first consumer product utilizing our aerosol generator technology and air freshener has been introduced nationwide in the United States.

Our licensee, SC Johnson, has a market presence in some 67 countries around the world and is a leader in the marketing of consumer air fresheners under the Glade name brand. Aerogen receives royalties on SC Johnson sales of both the device and fragrance refill components. Since SC Johnson promotionalized the product in the first European country in the first quarter of 2003, we have been receiving half a million dollars in minimum royalty payments per year. Now I would like to spend a few moments talking about our inhaled insulin product.

We announced at the beginning of 2003 that we had curtailed further development of this product and that we would await resolutions the widely perceived safety issues associated with long-term administration of insulin via the pulmonary route. These concerns were raised during clinical trials as a competitive dry powder insulin inhaler. Our AeroDose liquid insulin inhaler is designed to provide diabetic patients with an effective, convenient and discreet alternate for insulin injections for insulin administration.

Our inhaler is compact, lightweight, pocket-size; uniquely, it utilizes a propriety-type traceable mechanism that allows patients to vary their insulin dose based on the caloric content of the meal they are about to take. We developed our own proprietary glass cartridge and insulin formulation. The glass cartridge incorporated in the inhaler holds enough insulin for one to two weeks of doses for most diabetics. The inhaler is breath-activated, and it provides efficient delivery of insulin to the bloodstream. We completed two Phase 2 studies in type-2 diabetic patients, both with very promising results which are being both presented and published.

The commercial inhaler has completed design verification testing when our design was halted. We are now aware the European filing has been made seeking approval of the leading dry powder insulin inhaler for marketing, which perhaps indicates that the safety issues have been adequately resolved. There's speculation that the U.S. filing for this product will occur sometime within the next 12 months. Once that occurs, it will be appropriate to further evaluate the potential for partnering our liquid insulin inhaler.

We will seek a partner with the significant resources that will be required to complete the clinical program necessary for registration, and commercialize the product worldwide. And now finally, I would like to comment on the status of our intellectual property. We currently have 24 patents issued and 21 pending in the United States. Outside the United States, we have 11 issued and 35 pending patents.

Our patent sensor on protection of our aerosol generator and incorporation of the technology in pressure-assisted breathing systems, both in devices and inhalers. We exert considerable effort to ensuring we're aware of all intellectual property covering and surrounding our technology. As we announced yesterday, in 2003, Perry, located in Munich, Germany, notified Aerogen it had filed a patent infringement suit in the District Court of Menhein in Germany, alleging that Aerogen's Aeroneb Pro nebulizer infringed the European patent they had licensed from the technology partnership of [INAUDIBLE] in the UK.

We've been well aware of this patent for almost a decade; and while it is not our preference to litigate, we did so once challenged by Perry, and we proceeded with annulity action against the patent in the Federal Patent Court in Munich, Germany. We announced yesterday that the German patent court ruled in favor of Aerogen by nullifying all contested claims of this patent in Germany. As a result of the nullity ruling, there's now no basis upon which Perry's infringement action can proceed. Furthermore, the Court ordered the technology partnership to pay Aerogen's legal expenses related to this nullity action, to the maximum expense allowed under German law.

So with that summary of our activities, I'd like now to turn the call over to Bob Breuil, who will discuss our third quarter financial results and provide a further update on commercial partnering activities. Bob?

Thank you, Jane. During the second quarter, we completed the Series A-1 convertible preferred stock financing, which resulted in total gross proceeds of $32.7 million during the first half of this year. This significant milestone culminated a period of great challenge for Aerogen, as we strove to work off the backlog of Aeroneb Pro nebulizer orders from our existing customers, while we dramatically scaled up to supply new customers with much higher volumes of our Aeroneb Go nebulizer.

The [INAUDIBLE] for the first quarter had led to the near depletion of our supply chain, which is now getting back on track. The financing led to some noteworthy changes on our income statement and balance sheet, as a result of the unique accounting required for this new security. In addition to our net loss, we also now report the net loss available to common shareholders. This distinction is required for two reasons, one of which is temporary. First, let me deal with the temporary change.

Because the purchasers of our Series A-1 convertible preferred stock also received warrants to purchase our common stock, and there was no additional consideration paid for those warrants, and because, at least in the case of the first closing, the per common share of purchase price of the series A-1 was less than the then current market value of Aerogen's common stock, We were required to calculate and record a deemed dividend to capture the value of these so-called beneficial conversion features.

This dividend related to the difference between the actual consideration paid and the intrinsic value of the securities issue. In the first and second quarters, the deemed dividends were valued at $8.3 million and $4.5 million, respectively. As we have completed our issuances of Series A-1 securities, no further deemed dividends will be recorded. As for the more lasting changes to our financial statement, there are two.

The first can be found on the balance sheet, where the series A-1 convertible preferred stock is now referenced in the mezzanine portion of the liability section. Because the Series A-1 holders have certain rights that can trigger forced redemption under certain chains of control situations, a significant portion of the additional paid in capital related to the Series A-1 is recorded separately in this section. Second change is on the income statement ,and is related to the ordinary dividend that is payable quarterly on all outstanding shares of Series A-1.

Unlike the deemed dividend, which is an accounting entry that did not involve any payment to A-1 holders, either in cash or otherwise, the ordinary dividend is payable in cash or stock, at Aerogen's discretion, at the annual rate of 6% of what is known as the Series A-1 stated value. The current stated value of Series A-1 is $30 per share, which yields the current annual dividend obligation of $1.80 per Series A-1 share.

We have chosen to make the first two dividend payments in Aerogen common stock rather than cash. The value of this dividend is recorded along with the deemed dividend in a single line on the income statement labeled "dividends related to convertible preferred stock", and they total roughly $20,000 and $379,000 in the first and second quarters, respectively.

Now to the more exciting aspects of our financial results. Product sales consist of both our direct sales of products to distributors and sales of a component, the OnQ aerosol generator, to our Aeroneb Go manufacturing and marketing department, which is Medical Industries of America, otherwise known as MIA. We transfer OnQs to MIA at a contract supply price, and we receive royalties on MIA sales of Aeronet Go. As in most such contract supplier [INAUDIBLE] with a royalty component, the gross margin with the OnQ is much lower than we realize in a typical [INAUDIBLE] agreement, in which we did all of the product manufacturing.

While revenues were up for both the quartern and six months ended June 30th compared to the same periods of 2003, we experienced significant backlogs and sales interruptions during the first quarter of this yea,r as we strained to conserve cash prior to the Series A-1 financing. At the end of the second quarter, that backlog has been reduced less than 15% of our current sales, but we believe that our first and second quarter customer orders were also adversely affected by our first quarter interruptions and supply through our distributors. Cost of goods as a percentage of product sales was very high in the first and second quarter of this year.

There were two drivers of this result, one of which we believe was temporary. And that was a significant amount of expense related to the scale-up of our OnQ production capacity, to support the new, low-cost aerosol generator that was designed for the Aeroneb Go. To put this in perspective, the OnQ used in the Aeroneb Pro has been manufactured at rates that typically do not exceed 400 units per week, peak, while the OnQ used in a consumer-oriented Aeroneb Go had to be scaled to the peak capability of 4,000 units per week.

As I mentioned earlier, our OnQ contract supply agreement with MIA involves a royalty component, as well as the up-front payments totaling 2.5 million that are now being amortized over the life of the agreement. As the volume of our lower margin OnQ sales to MIA increases, we expect our gross margins -- which do not include the royalty or up-front amortization -- we expect those gross margins to decline as a percentage of product sales.

Research and development in the second quarter of 2004 were roughly equal to those in the same quarter of 2003, and up roughly 50% as we moved our lead drug product, [INAUDIBLE], into toxicology testing in preparation for the next multi-center Phase 2 clinical trial that will happen later this year. The decline in first half spending in 2004 as compared to the first half of 2003 is almost entirely due to significantly reduced payroll expenses following the reduction in force in the first quarter of 2003, as well as a similarly significant reduction at facility-related expense, in the wake of our lease restructuring that took place in the first quarter of this year.

We expect R&D to increase as we move our drug products into more advanced stages of clinical development. Regarding SG&A, those expenses were roughly flat in the year over year comparison, but the mix of expenses did change. As with R&D expense, the first half of 2004 saw a significant reduction in payroll and facility expenses, but these reductions were almost entirely offset by legal expenses in the first quarter of 2004. Finally, our cash balance at the end of the second quarter was just under 25 million.

We are currently using less than $1 million cash per month; but as I mentioned earlier, we anticipate ramping that up as we move into the Phase 2 clinical trials for amikacin, with a partial offset coming from increased product sales in the second half of this year. As we have discussed in our 10K and 10Q this year, we believe that our current cash resources are not sufficient to carry to us profitability, so we will most likely need to secure additional cash resources, either through industry partnerships, like [INAUDIBLE] Technologies, or the sale of equity securities or a combination thereof.

We continue to expect that our existing cash will sustain our operations through the first half of 2006. Thank you, and I will now turn the call back over to Dr. Shaw.

Thank you, Bob. Now we would like to take questions from the audience. Operator, would you please instruct the audience regarding the queueing process?

At this time, if you would like to ask a question, please press the star then one on your touch-tone phone. You may withdraw the question by pressing the pound. If you do have a question at this time, please press the star then one on your touch-tone phone. We'll pause momentarily for the first question . Once again, if you do have a question, please press the star and one on your touch-tone phone now. As we have no questions, I'll turn it back over to management for closing comments.

Thank you, operator. In closing, I would like to emphasize to all of you that Aerogen is operating with a clear set of goals and priorities, while maintaining financial prudence. We are focused on becoming a leading specialty pharma company, providing drug device combination products for the treatment of respiratory disorders in the acute care setting for U.S. marketing.

Our lead product is aerosolized amikacin for treatment of ventilator-associated pneumonia. If I summarize milestones for the remainder of 2004, I would highlight four activities. First, initiation of a Phase 2 multi-censored study for aerosolized amikacin under USIND. Second, the next pharmaceutical product for treatment of a respiratory disorder in the ICU will enter a Phase 2 study.

Third, we should announce an additional agreement relating to distribution of the sales of our Aeroneb Pro nebulizer. Fourth, introduction as the Aeroneb Go nebulizer into markets outside the United States will be announced. We thank you for your interest in Aerogen, your participation on this call today, and I certainly appreciate your support of the company and its activities. Have a good day.

This concludes today's call. You may now disconnect.