Nektar Therapeutics (NKTR) 2004 Q4 法說會逐字稿

Good day. Everyone is now on the conference line in a listen-only mode. I’d like to turn the conference over to Dr. Jane Shaw, Chairman and Chief Executive Officer of Aerogen. Please go ahead, maam.

Thank you. Good afternoon, ladies and gentlemen. Thank you for joining Aerogen’s fourth-quarter 2004 conference call. My name is Dr. Jane Shaw. I’m Chairman and Chief Executive Officer of Aerogen. With me today is Robert Breuil, Chief Financial Officer and VP of Corporate Development.

The press release regarding Aerogen’s fourth-quarter financial results was released earlier today, and it 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 web site in the Investor Relations section through March 22.

The matters we will be discussing today will include forward-looking statements and as such is 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-K, which was filed for the fiscal year ended December 31, 2003 with the SEC on April 14, 2004, and in our quarterly report on form 10-Q for the quarter ended September 30, 2004, which was filed with the SEC on November the 15, 2004.

I’ll now provide a brief overview of our corporate status and recent progress. 2004 was a tumultuous, and in the end, a very successful year for Aerogen. We started the year in search of capital. Our successful in completing a significant round of financing the Company. In May we finished raising approximately $31 million in net proceeds. Funds are sufficient to support execution of our business plans through 2005. We were fortunate that during that during the lengthy time it required to secure this financing, that the core Aerogen team stayed together. We remain together, and we continue to execute on the business plan that attracted our Series A-1 investors.

Aerogen has a solid and focused business plan. Our passion is to be a leading specialty pharmaceutical company, providing novel pharmaceutical products for the treatment of critically ill patients with respiratory disease. Particularly those in the Intensive Care Units of hospitals who require assisted breathing by a mechanical ventilator. We continue to steadily execute on our plan and have made brief progress during this past quarter.

Today I’d like to update you on our progress with our drug device combination pharmaceutical products, our nebulizers, our consumer products and the status of our intellectual property.

Our first pharmaceutical product is the drug device combination product incorporating our proprietary OnQ Aerosol Generator technology. It is an aerosolized antibiotic product for the treatment of ventilator-associated pneumonia. The drug we have chosen, Amikacin, is the ideal aminoglycoside to treat the drug-resistant gram-negative organism such as pseudomonas, which is a significant cause of that.

In 2004 we completed the Phase 2 study in Tours, France, and the results of this study were reported at the American [Thoracics] Society Meeting in Orlando last May. This study involved a single dose delivery of Amikacin, and it demonstrated the safety of the predicted efficacious dose. The data indicated that the efficiency of our product in depositing drug to the lung was greater than 60%. And the study also demonstrated that the concentration of drug in sputum was more than 100-fold higher than the concentrations reported following high-dose intravenous administration of the drug. We obtain concentrations of Amikacin in sputum that we believe should have a very effective microbiocidal effect in the lung.

During the fourth quarter, our IND was filed, and a multi center international Phase 2B study was initiated. This study involves approximately 100 to 120 patients who were diagnosed VAP in ICUs in the United States and Europe. All patients will receive intravenous antibiotics, and they are randomized to three groups to receive either aerosolized Amikacin low dose—that’s 400 mg once a day—or high dose—400 mg twice a day—or aerosolized placebo. Treatment will be from 7 to 14 days, and therapy will be continued after ventilator if necessary with the same drug device combination product to allow completion of the course of therapy.

Primary end point for this study includes measurement of drug in bronchial secretions, targeting a high multiple of the known minimum inhibitory concentration for pseudomonas and other organisms. We are targeting drug concentrations, and our clinical advisors agree should provide effective killing of the bacteria while minimizing the opportunity for bacterial resistance to develop.

In this study we are also monitoring clinical cure rates, speed of resolutions of the pneumonia, time on the ventilator and length of stay in the Intensive Care Unit. Data from this trial are targeted to be available in the third quarter of this year, 2005. We are guided in this program by a group of international advisors who bring their extensive medical, clinical and regulatory experience to bear on our program.

We have recently announced that the aerosolized antibiotic program has received fast-track designation from the FDA. The explanation that the FDA provided for awarding us fast-track status, including two main rationales. They specifically stated—one, ventilator associated pneumonia is a significant cause of morbidity and mortality in the Intensive Care Unit, with an associated mortality rate of up to 50%. Patients with ventilator-associated pneumonia have significantly longer duration, and mechanical ventilation, ICU stay and hospital stay. Secondly, they stated, “While gram negative organisms associated with ventilator associated pneumonia can be treated with aminoglycosides intravenously, parental delivery results in poor penetration of drug into the respiratory secretions and can cause significant adverse systemic effects. Targeted delivery of Amikacin directly to the lungs, takes advantage of the concentration dependent killing of aminoglycoside antibiotics and has the potential to hasten resolution of the infection. In addition, the combination of high antibiotic concentrations at the infection site with low serum levels offers the possibility of reducing systemic toxicity.” It’s a very strong rationale presented by the FDA, and we look forward to keeping you apprised of our progress with this product.

For our second pharmaceutical product, a Phase 2A trial also targeting treatment of critically ill patients with respiratory disorders in the ICU, will be initiated in the first half of this year. We intend to identify this product opportunity once the trials are initiated.

We’ve completed the in licensing agreement providing access to a third product opportunity for our target market. The first clinical trial for this product is targeted for the first half of 2006. We continue active negotiations pertaining to the in licensing of other proprietary drug candidates for aerosol delivery in the critical care setting. Currently we are specifically negotiating access to two drugs. One for treatment of respiratory disorders in neonates and one for treatment of acute exacerbations of chronic obstructive pulmonary disease. We believe that each of these drug candidates can progress immediately into Phase 2 trials following successful completion of our ongoing licensing negotiations.

Aerogen plans to commercialize each of these pharmaceutical products ourselves in the United States and partner them outside of the United States. We have initiated a dialogue with potential partners for the aerosolized antibiotic program, but we don’t anticipate finalizing any agreements until the Phase 2B data are available in the third quarter of this year.

Turning to our nebulizers—as we move our pharmaceutical products forward, we also remain focused on support of our nebulizer products, including the Aeroneb Pro, in the hospital setting. Aerogen’s Aeroneb Pro nebulizer is cleared as a multi patient use auto capable nebulizer for delivery of nebulizer solutions approved for use with general-purpose nebulizers.

For this CE mark and 510-K cleared product, we target aerosol delivery to adult patients on ventilators with an efficiency of delivery in the range of 12 to 15%, which is a 4-fold increase in efficiency when compared with use of conventional jet nebulizers. We distribute this device principally through ventilator manufacturers who both sell the products with their new ventilators and also target their installed base. Our existing distribution partners include, Puritan Bennett, McKay and Respironics. Together, these three companies we estimate have sold more than half of the 170,000 ventilators installed worldwide in the Intensive Care Units of hospitals, and they account for roughly half of the 17,000 new ventilators sold worldwide each year.

In the fourth quarter of 2004, GE Healthcare announced commercial introduction of two new critical care products—the Aptaer Heliox Delivery System and the Engstrom Carestation, which both incorporate Aerogen technology. Under our agreement with GE Healthcare, the Aeroneb Pro control module, which will only drive our proprietary nebulizers, is incorporated directly into GE Healthcare’s new critical care products as a standard option.

For the home nebulizer market, the Aeroneb Go nebulizer was introduced in to the United States market by our distributor EVO Medical Solutions—they were formally known as Medical Industries of America—in the first quarter of 2004. The product, cleared as a general-purpose nebulizer, is lightweight, simple to use, and it provides rapid treatment time. It has been accepted in the marketplace. In the third quarter of last year, EVO initiated commercial sales of the product in Japan.

For 2004 we booked total sales revenues of $4.4 million, which comprised product sales of the Aeroneb Pro and OnQ revenues from our manufacturing and distributing partner, EVO.

Finally, before we leave nebulizers, I would like to reaffirm that we announced earlier today that we have signed a development agreement with Biota Holdings of Melbourne, Australia. To develop a formulation of the lead long acting Neuraminidase inhibitor, suitable for use with our Aeroneb Go nebulizer. We anticipate booking product development revenues starting second quarter of this year. The compound we will be working with was originally developed by [Sankeo]. Biota and Sankeo have a joint development agreement for moving these Neuraminidase inhibitors forward.

Turning to our consumer product, the first was introduced, which utilizes our aerosol generator technology in an air freshener. It was introduced nationwide in the United States in the third quarter of 2004 by our licensee SE Johnson. SE 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 SE Johnson sales of both the device and the fragrance refill components. Since SE Johnson first commercialized the product in the European county in the first quarter of 2003, we have been receiving $125 thousand per quarter in minimum royalties. Bubba Breuil, our CFO, as he turns to the financing section, will update you on recent progress with that consumer product. Under the terms of the agreement in place, though, for the product, we receive royalties one quarter in arrears. So our financial statement for the fourth quarter reflect royalties on products sold during the third quarter. And we are very pleased to note that the third quarter’s royalty payment substantially exceeded the minimum royalty obligation of the $125 thousand per quarter.

Finally, I would like to comment on the status of our intellectual property. We currently have 37 patents issued and 54 pending worldwide. These patents center on protection of our Aerosol Generator and incorporation of the Aerosol Generator into pressure assisted breathing systems, nebulizers and inhalers. We exert considerable effort in assuring that we are aware of all intellectual property covering and surrounding our technology.

In April 2003, PARI GMBH of Munich, Germany notified Aerogen that it has filed a patent infringement suit in the District Court of Mannheim, Germany, alleging that Aerogen’s commercially available Pro nebulizer infringed the European patent that PARI has licensed from the technology partnership of [Hartfiture] in the U.K. 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 PARI and proceeded with a nullity action against the patent in the Federal Patent Court in Munich, Germany. The German Patent Court ruled in favor of Aerogen by nullifying all contested claims of this patent in Germany. TTP has petitioned for and been granted two three-month extensions in which to file an appeal to the German Supreme Court, and the legal responsibility for that final appeal has now been assumed by PARI. The infringement action is proceding, hearings are anticipated in June. As a result, however, the nullity ruling, we believe there is no basis upon which PARIs infringement action can proceed, unless the nullity appeal is granted by the German Supreme Court.

In summary, 2004 was a very good year for Aerogen. We made progress toward financial stability, we saw increased commercial margin growth from sales of our devices, combined with royalties from the introduction of the first consumer product incorporating that technology. Most importantly, within our specialty pharmaceutical business, which targets improved respiratory outcomes for critically ill patients, we saw a successful in licensing of compounds. And for our lead product, we saw the filing of the IND, initiation of a multi center international Phase 2 study, and the FDA’s award of fast-track designation, an action that facilitates more rapid approval of products which target a significant unmet medical need.

As we look forward to 2005, we anticipate increased product revenues and royalties. We anticipate results from the aerosolized Amikacin trial in the third quarter, followed by rapid progress towards presentation of the data for the FDA and continue preparation for the Phase 3 program. We will announce the second product as our Phase 2 study is initiated in the first half of this year, and we will also keep you apprised of our in licensing activities.

We look forward to keeping you updated as to our progress in the months ahead. And, certainly, thank you for your support and interest.

With that perhaps not so brief summary of our activities, let me now turn the call over to our CFO, Bob Breuil, who will discuss our fourth quarter financial results. Bubba?

Thanks, Jane. Before I walk through the financial results, I want to announce a completely non-operational change to our financial statements for 2004 and, perhaps, beyond.

As we announced today at our press release, and further amplified in the 8-K that we also filed today, we concluded that the accounting treatment of the Common Stock Purchase Warrants, issued in conjunction with our Series A-1 Preferred Stock financing during the first half of 2004 was incorrect. While the accounting theory underlying this new treatment is exceptionally technical, the practical impact is a reclassification of certain items on our balance sheet, and some resulting non-operating income or loss in each quarter, based on the changing valuations of our warrants.

Our operating income and cash flows have been, and will be, completely unaffected by this change in accounting. A full explanation of the new warrant accounting will be made in our 2004 10-K, and we will also provide restated financial statements for each of the three previously reported quarters for 2004. Again, these restatements will alter neither our cash balances nor our operating income.

Moving on to our actual operating results for 2004, I’d like to just start at the top of our income statement and work down.

Product sales consist of both our direct sale of products to our distributors and sales of a component, the OnQ Aerosol Generator, to our Aeroneb Go manufacturing and marketing partner, EVO Medical Solutions. We transfer OnQs to EVO at a contract supply price, and we receive royalties on EVO’s sales of Aeroneb Go. As in most such contract supply arrangements with a royalty component, the gross margin on the OnQ is much lower than we would realize of a typical distributor agreement in which we performed all the product manufacturing.

While revenues were up for both the quarter and 12-month ended December 31, compared to the same period in 2003, the increase was largely due to increased sales of the Aeroneb Pro as we temporarily suspended our shipment of OnQ Aerosol Generators to EVO shortly after the third quarter began, and have not shipped a revenue unit to EVO since that time. We anticipate resumption of revenue shipments to EVO within this quarter, and it’s been building stock of a newly designed OnQ at our risk, in order to mitigate the risk of supply interruptions to EVO’s customers.

EVO received a warning letter from the FDA, and in response to that warning letter, EVO voluntarily suspended shipments of the Aeroneb Go until a risk mitigation plan could be development and be presented to the FDA.

Similarly, Aerogen voluntarily suspended shipment of the OnQ Aerosol Generators to EVO, which resulted in no revenues from OnQ Aerosol Generators sales to EVO during the 6-month ended December 31, 2004.

EVO has, in fact, developed a risk mitigation plan that has been successfully reviewed by the FDA, which includes enhanced patient education, as well as a provision of a backup handset to a limited number of high-risk patients. EVO’s implementation of the risk mitigation plan is considered a Class 2, Company initiated recall, even though no devices have been retrieved from patients.

Less than a month after voluntarily suspending their shipments, EVO resumed shipments of the Aeroneb Go, incorporating their existing inventory of OnQ Aerosol Generators in conjunction with the plan I described earlier.

Aerogen has implemented several design changes to enhance the inherent durability of the OnQ Aerosol Generator.

During the quarter ended December 31, 2004, our reserve against cost of goods sold was increased to $100 thousand to cover potential costs related to Aerogen’s support of the EVO risk mitigation plan. We believe that we have now adequately reserved to cover our likely costs related to this recall, and no further charges are expected.

Royalty revenues increased significantly in the 12-month ended December 31, 2004, compared to the same period in 2003. The increase was due to royalties from EVO sales of the Aeroneb Go, which was launched in January of 2004, the $500 thousand in annual amortization of the upfront payments made late in the third quarter of 2003 in connection with the licensing agreement with EVO, and the receipt of significant royalties from SE Johnson on its sales of the air freshener that incorporates our Aerosol Generator technology.

The air freshener royalty payments for the third and fourth quarter was significantly above the minimum royalty obligation. Again, due to the time lag in actual royalty payments, we are booking royalties from this product one quarter in arrears. We will disclose the fourth quarter 2004 royalty payment as part of our first quarter 2005 results.

Cost of goods as a percentage of product sales has been very high throughout this year. There have been two drivers as a 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 low cost Aerosol Generator that was designed for the Aeroneb Go. The second driver of increased cost has been the delay in our transition of the low-cost OnQ manufacturing technology that we developed for the Aeroneb Go to our Aeroneb Pro, which has been scheduled to commence at the beginning of the third quarter, but was delayed to the fourth quarter by the need to support EVO and the Aeroneb Go.

As I mentioned earlier, our OnQ contract supply agreement with EVO involves a royalty component, as well as a $500 thousand in annual amortization of the upfront payments over the five-year life of the agreement.

Total research and development investment in the fourth quarter of 2004 were greater than those of the same quarter 2003, as we prepared for the fourth quarter initiation of the Phase 2B clinical trial for the Aerosolized Amikacin program.

In contrast, the decline in R&D investment for the 12-month ended December 31, 2004, as compared to the same period in 2003, is primarily due to the increase in manufacturing absorption as we scaled up commercial supply for the Aeroneb Go, significantly reduced facility expense, as a result of our lease renegotiation during the first quarter of 2004, and a reduction in payroll expenses following a reduction in force in the first quarter 2003. These reductions were significantly, but not completely, offset by increased clinical expenses related to the development of Aerosolized Amikacin. We do expect our investment in R&D to increase as we move our direct product in to more advanced stages of clinical development.

SG&A expenses were roughly flat in the year-over-year comparisons, but the mix of expenses did change. As with R&D expense, 2004 saw a significant reduction in payroll and facility expenses from 2003, but these reductions were almost entirely offset by legal expenses related to our financing during the first and second quarters of 2004.

SG&A expense for the 3-month ended December 31, 2004, was up from the same period in 2003, primarily due to increased spending on market research for the Amikacin product.

Finally, our cash balance at the end of 2004 was just under $17 million. We used an average of roughly $1.3 million in cash per month throughout 2004, and we anticipate maintaining that net cash burn as we move through the Phase 2 clinical program for Amikacin.

A significant unknown in this outlook is the royalty from SE Johnson’s air freshener product, which is only launched fully in the third quarter of 2004. It has already exceeded the contractual minimum payment, which is $125 thousand per quarter. We have limited visibility into the rate of growth of this product, and we have no control over, nor input, to its marketing.

As we have discussed in our 10-K and 10-Q during 2004, our current cash resources are not sufficient to carry us to profitability, so we will need to secure additional cash resources, either through industry partnerships, licensing of our technologies, the sales of equity securities, or a combination thereof. We expect that our existing cash, however, will sustain our operations into the first quarter of 2006.

Thank you, and I will now turn the call back over to Dr. Shaw.

Now we would like to take questions from the audience. Operator, would you instruct the audience regarding the queuing process?

Yes, Doctor. [OPERATOR INSTRUCTIONS] Dr. Shaw, it appears we have no questions at this time.

Well, I thank you very much, 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 pharmaceutical 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 an Aerosolized antibiotic for treatment of ventilator-associated pneumonia.

If I summarize milestones for the coming months, I would highlight four activities. First, completion of a Phase 2 multi center, multi national study for Aerosolized Amikacin by the third quarter of 2005. Second, our next pharmaceutical product for treatment of respiratory disorder in the ICU will enter Phase 2A study in mid-year 2005. Third, we will announce additional agreements relating to the distribution of our Aeroneb Pro nebulizer. And fourth, we will see introduction of the Aeroneb Go nebulizer in to additional markets outside the United States by Aerogen, generating increased revenues and improved gross margins for this product.

Thank you for you interest in Aerogen and your participation on this call today. I certainly appreciate your support of the Company and its activities. Have a good day.