Nektar Therapeutics (NKTR) 2004 Q3 法說會逐字稿

Good afternoon, ladies and gentlemen. Welcome to the Nektar conference call. At this time all participants are in a listen-only mode. Later we will conduct a question and answer session. Please note 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 Therapeutics analysts conference call and webcast to review our performance for the third quarter ended September 30, 2004. I'm 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 start I would like to stay that the following presentation contains forward-looking statements that reflect our current views as to the Company's business strategy, future products, product and technology developments, funding, collaboration arrangements, clinical trials, manufacturing scaleup, 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 as amended for the year ended December 31, 2003. And our quarterly report on form 10-Q for the quarter ended June 30, 2004. Actual events could differ materially from these forward-looking statements. I would also like to remind you that the web broadcast of this conference call will be available for replay through November 17, 2004 on the Investor Relations page at Nektar's website at www.Nektar.com. In the event that any non-GAAP financial measure is discussed on this conference call that is not described in our earnings release, related information will be made available on the Investor Relations page at our website as soon as practical after the conclusion of this conference call.

In the third quarter 2004 we saw progress with two of our late stage products, Exubera our inhaled insulin product being developed with Pfizer and Sanofi-Aventis and Macugen for macular degeneration in development with Eyetech and Pfizer. Pfizer and Sanofi-Aventis presented encouraging two year Exubera data at the European association for the study of diabetes or the EASD in September showing sustained blood glucose control and pulmonary function for two years in patients with Type II diabetes. These results were from trials extended from 6 months to up to 2 years where the primary objective was to assess long-term pulmonary safety. Eyetech's Macugen also made several advances. First the filing of a marketing authorization application for Macugen was accepted by the European Medicines Agency or the EMEA, and second in the U.S. the clinical submission for Macugen was reviewed by the FDA advisory committee.. Finally, Eyetech presented additional data in October that showed the benefit of extending treatment of Macugen over a 2 year period. During our prepared remarks today we will discuss our progress in more detail. First, Ajay will review our financial performance. Next, Chris will review the Exubera program, our partner products other that Exubera with more specific information about Macugen, and finally our proprietary products program. Following Chris I'll close by reviewing our anticipated milestones for 2004-2005 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. Welcome to all of you on the call. Let me briefly highlight some of our financial results. First, let's look at revenue. Our revenue for the first nine months of 2004 was 82.9 million, compared to 80.6 million in the same period last year. We continued to express full year 2004 revenue in the range of 110 to 120 million. Our product sales for the first nine months of 2004 were 15.7 million compared to product sales of 21.4 million for the same period last year. We expect fourth quarter product sales to be higher than third quarter product sales. This increased level of projected fourth quarter product sales over the third quarter is due to progress made in addressing the PEG manufacturing problems encountered in the second and third quarter of 2004. As you will recall, we discussed these PEG manufacturing problems on our last conference call. As a result, we now anticipate that full year product sales will be between 23 to 25 million at the lowest end of our previous guidance.

Let's turn now to net loss. The net loss has increased from 17.2 million for the third quarter of 2003 to 20.5 million in the third quarter of 2004. This was largely due to increased R&D expenses for our proprietary products program. For the full year 2004 we continue to project a net loss of between 100 to 110 million, which is the same as our previous guidance. Let's now look at cash. We ended the third quarter 2004 with 426.9 million of cash, cash equivalents, and short-term investments compared to 425.3 million at the end of the second quarter. The third quarter balance includes 22.5 million of cash received by us from sale of a partnership and trust in one of the buildings in Saint Carlos we are currently leasing. In the third quarter 2004, cash used by operating activities was 12.5 million, and capital expenditures was 6.3 million. For the first nine months of 2004 cash used by operating activities was 70.7 million and capital expenditures were 20.3 million. We now anticipate that we will end the year with more than 400 million in cash and short-term investments compared to our previous guidance of 390 to 400 million. And now I will turn the call over to Chris Searcy who will review our business progress this quarter.

Thanks, Ajay. First, let's review Exubera. Pfizer and Sanofi-Aventis presented encouraging data at the annual conference of the EASD in Munich in early September. The primarily objective of these trials was to assess the long-term pulmonary safety of Exubera. After two years there were no significant differences in pulmonary function tests between Exubera and the controlled groups. During the two year period patients in both Exubera and the control group experienced declines in pulmonary function from baseline measured as FDV1 and DLCO. At week 24 small differences in decline in FDV1 and DLCO in favor of oral agents were observed. After two years of treatment, confidence intervals for changes in FDV1 and DLCO indicated no significant differences between the groups. The results were summarized by professor Manfred Dreyer, lead study investigator, who said these data show that small pulmonary function differences between the two groups occurred early after the initiation of -- after treatment initiation had no identified clinical relevance and did not progress with two years of continued inhaled insulin treatment. Efficacy continued to be demonstrated by a reduction in hemoglobin A-1C levels in the Exubera group. Again, this is encouraging data towards defining the pulmonary safety of Exubera.

The second late stage product in our partner pipeline Macugen is being developed by Eyetech and their partner Pfizer using our PEGylation technology for treating the wet form of age related macular degeneration. Age related macular degeneration is a retinal eye disease that can cause loss of central vision. The wet version is characterized by the development of abnormal leaky blood vessels. Although only 10 to 15% of the all age related macular degeneration cases are the wet form the chance for severe sight loss is much greater. In June, Eyetech and Pfizer filed a new drug application with the FDA for Macugen as a treatment for wet age related macular degeneration. Subsequently in late August the FDA dermatologic and opthalmology -- opthalmologic drugs advisory committee met and reviewed the clinical submission for Macugen. According to Eyetech the FDA, PDUFA date is scheduled for December 17th. And assuming all goes well the launch of this product is planned for the first half of 2005. By the way PDUFA stands for Prescription Drug User Fee Act. The PDUFA date is the date by which the USFDA is expected to review and act on an NDA submission. On September 20th, Pfizer and Eyetech announced that the EMEA accepted the filing of their marketing authorization application for Macugen in Europe and they have begun clinical trials in Japan. Most recently on October 22, 2004 Eyetech presented two year data for the use of Macugen in the treatment of AMD at the meeting of the American academy of Opthalmology in New Orleans. The second year of the study which included 1,053 patients was designed to investigate the need for continued chronic treatment beyond one year and to establish the safety of longer term treatment. According to Eyetech the study demonstrated that the positive effect of Macugen is extended to two years. A treatment benefit is also seen for patients who receive Macugen for two years compared to those only receiving one year of therapy. The Safety profile is similar to that of the first year with no new safety concerns identified. As you are most likely aware Macugen is fast-tracked in the U.S. Our portion of the royalty and manufacturing fees after the portion we share with ENZON is in the low to mid-single digits.. We estimate that the peak annual revenue to Nektar from this product would range between 25 and $50 million.

Now, I would like to take a few minutes to discuss our proprietary products program. As we said over the past two years the goal of the proprietary products program is to apply our technology to already approved molecules and advance products further into development in order to increase the share of revenue Nektar receives compared to partnering products at early stages. Over the past two years we have been very pleased with the quality and number of opportunities that we've uncovered. We have now taken four products into development. One is an inhaled formulation of a small molecule that has entered Phase I testing. A second is an inhalation product that has entered proof of concept clinical testing. The other two programs are in preclinical testing. For competitive reasons we are not disclosing the specific molecules we are developing at this time. Although at an early stage we believe that all of the programs taken into development meet our market opportunity threshold of having the potential as of today's market and if it's successful to generate over 400 million per year in sales. Each of these programs is for a molecule that is already approved in another delivery form so we are not taking any new chemical entity risk. We believe that these four programs as a group provide an excellent risk reward profile for Nektar, I would now like to turn the call back to Ajit who will conclude with a summary of our milestones for the rest of 2004 and 2005.

Thanks, Chris. During 2004 either our partners or we have achieved key milestones that have positioned us for significant progress in the next 14 months. First, our late stage product pipeline including Macugen and Exubera as Chris has discussed has advanced. Eyetech believes that Macugen could be launched in the first half of next year. In addition to Macugen and Exubera progress earlier this year Celltech which is now a part of UCB. a Belgian company, announced preliminary Phase III data regarding CDP870 for rheumatoid arthritis that showed that they had met their end point. They also announced that they had entered Phase III for CDP870 for Crohn's disease. Further, in March they stated that they planned to file for approval for CDP870 rheumatoid arthritis in 2006 and for Crohn's disease in 2005. CDP870 uses Nektar PEGylation. We also disclosed this year that Roche's CERA uses Nektar PEGylation and is in Phase III trials for treatment of renal anemia. In October Roche said that this program is moving ahead as planned. Patients are currently being recruited into Phase III trials of the drug in renal anemia. Relevant to our earlier stage partner pipeline, Chiron completed a Phase I trial of inhaled Tobramycin in cystic fibrosis patients, discrete lung infections, and concluded that the data were encouraging enough to move into pivotal trials in 2005. We announced three new agreements including one with Pfizer to PEGylate a product that is in clinical testing. Another with GlaxoSmithKline to PEGylate a protein in preclinical investigation. And finally, within an undisclosed biotechnology company to PEGylate another preclinical project. We continue to see interest in our technology platforms from major pharmaceutical and biotechnology companies and we anticipate additional partnership deals during the next 14 months. We have identified and are developing four proprietary products which we believe have significant potential. And we improved our balance sheet, we reduced our convertible debt owed from approximately 360 million at the beginning of this year to 174 million and we ended this quarter with almost $427 million in cash. We believe that we are well positioned for a very eventful 2005. Progress from our late stage clinical pipeline, particularly Exubera and Macugen and the advancements of our four proprietary products should combine to make 2005 a pivotal year for the Company. With that I'll turn the call over to all of you for your questions. Operator will you please poll the listeners for any questions.

Thank you, sir. (OPERATOR INSTRUCTIONS) The first question comes from Jim Reddoch from Friedman Billings. Please go ahead.

Good afternoon and thank you very much for taking my call. On Exubera's development you spoke about the data presented at EASD. Do you believe that that finishes the safety question or is there a need for some separate prospectively defined safety trials to finish out the safety part of the Exubera application?

Jim, it's Chris. In terms of the two year safety data that was presented at the EASD, that was data that was an extension from a 6 month trial, European trial in Type II patients and just summarizing data it showed that there was no significant difference between an oral treatment group and the inhaled group at 104 weeks and that was a prospectively randomized trial and that is a key component of the safety database. In terms of of your question specifically though, is that all that is required that is something that you just have to refer to Pfizer in terms of whether or not that is sufficient from a safety standpoint in terms of I presume you were referring to a UF filing.

That's correct. And now that you bring it up, the European filing, what really did happen in Europe there, can you -- can you give us any color on the committee on safety of medicines issue a couple of months ago? Thanks.

Per our previous statement we're not commenting on that. Again, I would refer you to Pfizer for any further information on that particular issue.

Okay, thank you.

Thank you, our next question comes from Mara Goldstein from CIBC World Markets. Please go ahead.

Thank you. A question on Macugen. You had said that you had received low to mid single digit royalties and that's globally. So it's saying in U.S. and outside U.S.?

Yes, it is.

Okay. And one more question on the proprietary pipeline, I know you're not disclosing what the molecules are, you did mention the same molecules that are currently available in other delivery forms. Are they for the same indication or are you looking at new indications?

You know, Mara, we haven't specifically talked about that. You know, at some point we will talk about the proprietary programs and we'll give you more insight into why we think we are adding value to those particular programs but we have not talked to any specifics in terms of indication molecules and just a little bit in terms of root of administration but we just haven't disclosed anything related to that.

Thank you.

Thank you. Our next question comes from Patty Bank from Pacific Growth Equities. Please go ahead.

Good afternoon. With regard to the Pfizer and Sanofi-Aventis agreement, can you talk a little bit about the ongoing litigation between the two more in terms of the manufacturing and potentially what would happen if Pfizer bought back 100% of the rights of that product but was unable to secure the German manufacturing facility?

This is a lawsuit between Pfizer and Sanofi-Aventis and we are not involved. Because our contract is with Pfizer and not with Sanofi-Aventis so we really aren't in a position to comment on, you know, what might happen in terms of, you know, in terms of sort of a lawsuit. I mean what Pfizer has said is that they don't expect this lawsuit to have any impact on their, you know, regular due process in Europe or their ongoing discussions with the FDA but beyond that we aren't in a position really to comment on it.

What about just as a follow-up from your perspective for Nektar, what would be the best outcome for you? Would it be for it to stay a three way agreement between both Pfizer and Sanofi-Aventis or for Pfizer to take back the full rights?

Our agreement is with Pfizer. The program has worked for many years with Aventis being a partner and we think it's sort of gone along quite nicely and so our focus is really to do all the things we need to do to support a U.S. filing and then after that a commercial launch of the product and, you know, that is sort of what we sort of remain focused on.

Okay, thank you.

Thank you. Our next question comes from Hari Sebatebum from Merrill Lynch. Please go ahead.

Yes. Thank you. Just a follow-up on the prior question on Sanofi. In terms of your interactions with the two companies, are there no interactions in terms of manufacturing process, et cetera with yourself and Aventis and Sanofi at this point in time or is it solely -- if the relationship and your interactions is it solely with Pfizer or is there some interaction with Sanofi just from an executional point of view?

You know, over the years there have been interactions with Aventis as one would expect since, you know, they -- they supplied the bulk insulin even though it sort of comes from a jointly owned plan. But our primary, you know, interactions and our contractual agreements are with Pfizer and so by far the predominant discussions and interactions are all really with Pfizer.

The only reason I ask that is I'm wondering if there is some sort of a separation of the relationship there, you know, are these tasks that you're interacting with Sanofi, are they easily transferable to Pfizer, are there things that are not transferable? Is there a time delay involved. Could you maybe expand upon that?

We really are not in a position to expand upon that.

I don't want you to expand upon what Pfizer thinks but rather from a Nektar point of view from the tasks that you are in control of.

You know, once again without knowing sort of how -- what it is Pfizer and Aventis are doing it's sort of hard for us to comment on what a change might or might not do and so--

Is it something that you are not preparing for?

As I said, our focus just continues to be get ready tore to for the U.S. -- do whatever we can to support the filing of the NDA in the U.S. and, you know for commercial launch of the product. And that's sort of our, you know, sort of what we bring to the party and our focus is just let's just execute on that. And we see no reason at this point to do anything differently really.

That's great. I have one additional question on manufacturing in terms of the European filing, at what stage do you expect European, you know, inspections to happen for your facilities? Is it -- is it par for the course that you would expect the European inspection of your facilities or is it not par for the course? And if it is, I'm just trying to figure out, you know, is it an '05 event or is it -- has it already happened in '04? I mean could you give us a sense of, you know, what your sort of time lines are? Just from -- you know, getting ready for inspection.

You know, I think in terms of sort of the general process before approval regulatory agencies do come in and inspect manufacturing sites. Beyond that we haven't sort of disclosed any timing of any particular events or anything like that. All such disclosures on this program have always come from Pfizer and/or Aventis and really it's up to them because they control sort of all of the regulatory filings and the related items. It's really for Pfizer to make any of those types of the disclosures.

Thank you.

Our next question comes from Lawrence Plumberg from Plumberg Capital. Please go ahead.

Hi, just a quick question on the recent mix shelf that you you filed. Why now and what is your thinking with respect to when you draw that down based on upcoming milestones and what's your plan here?

You know, we filed the shelf because -- I mean we think it is a prudent thing to have a shelf filing. I mean it doesn't really commit us to doing an additional file financing at any point in time but, you know, financing windows in the recent past have tended to be quite short and if one does -- decides to do a filing when a financing window opens up and you know the SEC is doing more and more reviews of all of these filings, sort of for all companies, and if you ended -- end up getting reviewed our understanding is it could be easily a month and maybe as much as three months before you get approval on the filing and if it's at the longer end of that -- of that time span then there is a pretty good chance that the financing window has closed. And so for us it just seems to make sense, you know, to sort of do a shelf filing and have it ready should we ever need it. You know, some of the types of things we might want to use it for are investing or accelerating various of our proprietary product development programs. We believe we have got some excellent opportunities there and depending on how we, you know, how we feel about those, that might be one possible. The other one is we do have, you know, some convertible debt outstanding still and at some point it might make sense for us to do a financing for, you know, to fund possible repurchase of those outstanding convertible notes. So this is more just, you know, we think it just makes sense to be ready.

Yeah, Lawrence, this is Rob. A thing to keep in mind is that shelf now -- is once you've filed and they're accepted they are valid for two years. So it's a very long window of time that it gives you flexibility if it is something you decide you want to do at a later time.

Well, I guess the last time you raised money was after your European filing so--

That's right.

Thank you very much.

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

Thanks. Good afternoon. A couple of questions. The first one just back to the change of control with Aventis and Pfizer. Is there anything in your contract I guess with Pfizer that would allow you to get a change or improved economics if there is a change of control?

David, once again, we have never sort of disclosed the terms of our -- of our contract. And so we sort of never have -- we have never really discussed anything like that before and you know I think we would just keep it that way.

But you have given guidance to the street in terms of, you know, if Pfizer does X million in revenues how to look at your contributions. So I guess if there is a change of control would it still a fall within that band?

Yeah, I mean it would still a fall -- yeah, it would still fall within that band.

Okay. And then another question. A year ago in giving guidance you'd indicated that you thought you would be profitable with or without Exubera in 2006. Does that still stand?

I'm trying to recall if that was in our last earnings call that the similar question came up. Our focus at this point is really running the business assuming Exubera. Sort of given everything that has transpired we think that's sort of the best way to manage the business and that's sort of our focus. If for some reason we ran into a major problem with Exubera, we would have to deal -- we would obviously have to deal with that but right now we still continue to run the business with the goal of achieving profitability in a sort of 12 months after a broad Exubera launch.

Okay. So it is not 2006 then, it's whenever you launch the product?

Yeah, I mean that is sort of what we have been saying is really 12 months after a broad Exubera launch and we were sort of going to stick with that guidance at this point.

Okay. That's fair. Final question on the P&L. In terms of the royalty and product revenues I think Ajay had indicated that second quarter there has been some manufacturing issues with your PEG products. What would the quarter have looked like from a revenue standpoint if you hadn't had that manufacturing issue?

The product revenues in the quarter would have been a little bit higher as we would have shipped more product out the door. But we'll catch up on most of that in the fourth quarter and early part of next year. Part of the reason why our product revenues are low compared to last year is just that they are somewhat of a low demand.

Sorry could you repeat that? You said lower demand?

Yes. I think last year a lot of the partners, their purchases were to support ongoing sales but also to build inventory in the channel and sort of in their own location. That has been done and now the sort of our sales I think will be much more to support ongoing sales of the product.

But you do get royalties so obviously Neulasta is one of your important products and Pegasys and they have been growing reasonably well, I know Intron has not. Why would your numbers then been substantially lower given that those -- the end market sales of two of those products have been increasing nicely?

David, as you might recall, we are actually being very conservative about our product revenues and we have always maintained with you, with you meaning broadly the investors that most of the revenues we get the vast majority of the revenues are manufacturing related and the royalty component of those revenues is very marginal.

Well, we should probably also note that with Macugen launch assuming that that launches -- that equation should change and the royalty component will be significantly increased. Because the early deals that we did, Pegasys and Neulasta falling into that category were either manufacturing deals or very, very small royalties.

Exactly. That is why you don't -- even though those product sales are increasing quite nicely you don't see the attendant impact on our P&L because of those two specific products, the deals being what they were.

Okay, thanks.

Thank you. Your next question comes from Bert Hazlett from Suntrust. Please go ahead.

Hi, I was wondering too, but I wanted to follow up on David's point and the answer that you just gave there. In terms of the manufacturing revenues versus small royalties that you have received on prior PEG programs, how would you characterize Macugen, once again relative to that?

As Rob just mentioned Macugen is going to be a dramatic shift. We will continue to get the manufacturing revenues as with other products but more significantly of course as we have guided you, we will start receiving low to mid single digit royalties on Macugen sales and those are low to mid single digit royalties to us after we have paid off the Enzon portion of the royalties. So certainly the revenues that we get from our PEGylation business would change quite dramatically in line with our significant royalty component to them.

Thank you, that's helpful. Now Enzon does not participate in any of the manufacturing component of that, just the royalties, right?

I believe that's true.

Okay. Love a little clarity there. But shifting on to the next subject is Tobramycin the inhaled TOBI powder program. I know you have made some brief comments. Could you talk about when you might receive the next -- or when the next meaningful milestone might occur for that program and can you talk about the -- any adverse events in the Phase I data that you have seen with that program? Thank you.

In terms of the next milestone it's just the guidance that Chiron has provided which talks about the start of a pivotal trial in the first half of '05 and they have also given some clarity in terms of the pivotal and supporting trial. They are going to do two trials. One is going to be randomized two months on therapy versus placebo and that's the pivotal and the supportive trial is similar to what they're currently using which is one month on, one month off. The next key milestone will be the start of the pivotal Phase III trial with that first half of '05 according to Chiron guidance. In terms of adverse event reporting there is nothing specific that we are aware of that occurred in the Phase I trials in terms of adverse events.

Thank you.

Thank you, again, if you have any questions or comments please press star, one. Thank you. We have a question from Bert Hazlett from Suntrust. Please go ahead.

I Figured I would just jump in again at the end. Could you just comment in general terms about how you view your appetite for other drug delivery platforms? Whether or not you might consider them in addition to what you have now? Thank you.

I think we are always looking at new technologies, new delivery platforms. I think in part because if you don't do that somebody is going to surprise you. Having said that, I think our clear priority at this point is to invest in product development over technology development. I think the bulk of our technology development investment is going to sort of finishing and/or improving what we already have as opposed to going and getting new platforms. We think we have got a pretty darn good base of drug delivery technology and what -- what our focus is is let's apply that to product development and that is where the bulk of our attention and our investment is going.

If you contract it to other types of companies what we're finding is we're looking at the proprietary products area is really a wealth of opportunities for us. So we're finding that our platforms that we have are very rich in generating the product opportunities. We think the way for us to really maximize the value for our shareholders is really to convert the investment we've made in technology into product opportunities that we can take, you know, into and through, you know, through clinical testing.

The one thing I will add to that is sometimes we see product opportunities on the outside that use a drug delivery technology platform but again the focus is on the product application of that and typically that may be in an area where we have some know how in the area for example in the pulmonary space so when we look at technology platforms for the most part they typically have a product associated with it and then we end up looking at the product and the technology platform sort of simultaneously.

Some way to think of it is not necessarily that we wouldn't necessarily add a platform but the bar would be very high given our other investment opportunities in the company.

Yeah.

Thank you. That's very helpful. Thank you very much.

Thank you. Once again if you have any question or comments please press star, one. Thank you. The next question comes from Rich Silver from Lehman Brothers. Please go ahead.

Could you just tell us exactly what activities on Exubera you are conducting right now in terms of the manufacturing and development? You know, what sort of in the last three months and what you would be expecting over, say, the next three months?

Rich, we have never gotten into that level of detail and so I think -- I think for us it is just best to say that we are just focused on, you know, supporting the NDA filing and getting ready, you know, getting sort of ready for commercial launch.

As you know our responsibilities are the device portion, producing the powders and the filling technology and we are very focused on those portions of the Exubera program.

Right. Okay. But as far as any sort of changes, that is not something you would be willing to share?

Yeah, I mean exactly. In terms of sort of exactly where we are, I don't think that -- yeah, we are not prepared to sort of share that.

As always it's been really for Pfizer and Aventis to talk about the status of the programming and obviously giving any of sort of the specific details there would sort of be giving kind of the specifics of where we are and that's something as we have been really since signing with Pfizer in 1995 it's really for them to do that, as you know.

Okay. Thanks.

Once again, if you have any questions or comments please press star one.

If there is no further questions at this point I would like to just thank everybody for attending this call and I guess we will see you all about three months from now. Thanks.

Thank you. Ladies and gentlemen, this concludes today's conference call. You may all disconnect. And thank you for participating.