Nektar Therapeutics (NKTR) 2005 Q1 法說會逐字稿

Good afternoon, ladies and gentlemen, and 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 that this conference is being recorded.

I would now like to turn the call over to Mr. Ajit Gill, Chief Executor Officer of Nektar Therapeutics. Mr. Gill, you may begin.

Thank you, operator. Welcome to Nektar Therapeutics' Conference Call and Webcast to Review our Performance for the First Quarter of 2005. I'm Ajit Gill, President and CEO of Nektar. Joining me, today, are our CFO, Ajay Bansal; our Vice President of Corporate Development, Chris Searcy; and our Executive Chairman, Rob Chess.

Please note 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 scale-up, 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, 2004. Actual events could differ materially from these forward-looking statements.

I would like to remind to you that the web broadcast of this conference call will be available for replay through May 23, 2005, on the "Investor Relations" page at Nektar's website, at "www.nektar.com."

In the events that any non-GAAP financial measure 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.

Starting with Exubera, most of you know that, on March 2nd, Pfizer and Sanofi-Aventis announced that the Exubera NDA was expected for filing by the FDA. This is truly a significant milestone for Exubera, a product we believe has the potential to be a breakthrough in diabetes therapy.

On the call, today, first, Ajay will provide our financial overview along with some clarifications surrounding our guidance for 2005. Then, Chris will follow with a discussion of Exubera, and then he will update you briefly on our partnered products and provide a quick summary of milestones, going forward. I'll follow with a brief summary, and then we'll turn it over to you for your questions.

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

Thank you, Ajit. And welcome to all of you on the call. I would like to take you briefly through our first-quarter financial results, and then I'll review our guidance for the full-year 2005. First, let us review revenue for the first quarter.

For the first-quarter 2005, we reported revenue of 28.5 million, which was approximately 2.6 million higher than the revenue for the first quarter of last year. First-quarter 2005 revenue included contract research revenue of 19.5 million, product revenue of 6.4 million, and Exubera commercialization readiness revenue of 2.6 million.

Contract research revenue consists of reimbursed research and development expenses and amortization of upfront signing and milestone payments received from a collaborative partner. Our first-quarter 2005 contract research revenue of 19.5 million was approximately 2 million lower than contract research revenue for the first quarter of 2004. This reduction is due to lower contract research revenue from Exubera as well as receipt of onetime termination fee of $2 million from Aventis' bearings in 2004.

Our product sales are almost entirely comprised of sales of our PEG reagents. Our first-quarter 2005 product sales of 6.4 million were approximately 2 million higher than product sales for the first quarter of 2004. Our first-quarter 2005 product sales were approximately 3 million lower than product sales for the fourth quarter of 2004.

As we discussed with you in March, fourth-quarter 2004 product sales reflected a catch-up for lower sales in the first nine months of 2004 that had resulted from manufacturing problems encountered earlier in the year.

Our first-quarter 2005 product gross margins were 18% compared to 42% in the first quarter of 2004. These lower gross margins are primarily driven by a change in product mix, less favorable overhead absorption, and increased product write-off and result charges. As we discussed with you previously, we continue to expect quarter-to-quarter lumpiness in our product sales and product gross margins.

Exubera commercialization readiness revenue was 2.6 million. This revenue represents reimbursements by Pfizer of certain agreed-upon operating costs related to our Exubera drug powder manufacturing facility in preparation for commercial production.

Let us now turn to our loss from operations. Our first-quarter 2005 loss from operations of 24 million is $8 million higher than our loss from operations in the first quarter of 2004. This increased loss stems from a 0.7 million decrease in product gross margin, an increase in R&D of 3.7 million, and an increase in G&A of approximately 2.3 million.

Let us now turn to our net loss. We reported a net loss of 26.2 million, or 31 cents per share, for the first quarter of this year compared to a net loss in the first quarter of 2004 of 40 million, or 64 cents per share. You may remember that our net loss of 40 million in the first quarter of 2004 included $12.7 million in payments made in connection with conversion of convertible subordinate notes and a loss from debt extinguishments of 9.2 million.

We ended the quarter with approximately 401 million of cash, cash equivalents, and short-term investments compared to approximately 419 million of cash, cash equivalents, short-term investments as of December 31, 2004.

Let us now turn to our guidance for 2005. We are anticipating that total 2005 revenue will be between 120 and 130 million. This revenue guidance is comprised of contract research revenue of 75 to 80 million, product sales and royalty revenue of 30 to 35 million, and 10 to 15 million in commercialization readiness revenue from Pfizer. This revenue guidance does not include any revenue from potential commercial sales of Exubera devices or Exubera drug powder to Pfizer.

Let us now turn to our net loss guidance. We anticipate a net loss between 115 to 125 million. Our net loss is comprised largely of the following: one, our out-of-pocket spending on our partnered program of 15 to 20 million; two, our spending on our proprietary products and our technology platforms of approximately 70 million; three, G&A expense of 35 to 45 million; and fourth, amortization, net interest and other expense of approximately 10 million.

Finally, these expenses are offset by margins of 15 to 20 million on product sales, royalties and commercialization readiness revenue to result in a net loss in the range of 115 to 125 million.

Let us now turn to our guidance for cash, cash equivalents, and short-term investments. In the absence of any financing activities, we continue to expect to end the year with more than 270 million in cash, cash equivalents, and short-term investments.

With regard to profitability, we continue to target profitability at fourth quarter after the launch of Exubera in both the US and the major markets in Europe, including France, Germany, Italy, Spain, and the UK. This profitability guidance does not take into account the impact of stock option expensing.

I'll now turn the call over to Chris Searcy, who will discuss Exubera and our other partnered programs.

Thanks, Ajay. Given the key milestones achieved by Exubera in the first quarter, today, we'd like to focus on certain regulatory timeline questions that could apply to Exubera, recognizing that, of course, we are not able to provide any proprietary information or information that has not already been released by our partners.

Pfizer and Sanofi-Aventis announced that the FDA accepted for filing a new drug application for Exubera on March 2nd. Many of you have asked for information regarding the timing of PDUFA date for Exubera. PDUFA stands for Prescription Drug User Fee Act, and the PDUFA date is a goal for the FDA to review the NDA filing and provide feedback to the applicant.

The PADUFA Act of 2002 has defined a target for the agency to respond to 90% of filings within 10-months of filing. This is a target date for response and there are no guarantees that this will be met. In addition, the agency can negotiate an alternative date with the applicant based on how the review is proceeding. Pfizer has not discussed the PADUFA date for Exubera and any specific guidance on PADUFA date timing will come from Pfizer and/or Sanofi-Aventis.

Secondly, we've had many questions about the European regulatory process, which is different than the US process. We wanted to share some general information about our understanding of the European process and timeline. First, the timetable takes approximately 300 calendar days with two clock stops that could add an additional six to eight months to the process or longer. Meaning that a product could take up to 18 months or longer for review and approval. The first clock stop happens at day 120 when the applicant receives queries from the Committee for Medicinal Products for human use, also called the CHMP and has up to six months to respond to those queries. The CHMP, by the way, is responsible for including the quality, safety, and efficacy of a medicinal product are sufficiently proven.

The second clock stop could occur at day 180, when the CHMP decides a need for an oral hearing, at which time the applicant presents responses to remaining questions not yet answered during the process to date. At that time, the clock stop is for an unspecified period of time, often 30 days, although it could be longer for the applicant to prepare for this hearing. The hearing restarts the clock at day 181. At day 210 or the next CHMP monthly hearing, the CHMP adopts a decision on the product. If they think the safety and efficacy of the medicinal product is sufficiently proven, they adopt a positive opinion and make a recommendation to the European Commission regarding the application. The recommendation includes a detailed summary of their review as well as such things as recommended labeling.

The CHMP opinion, either positive or negative, is posted in the monthly minutes of the CHMP or the EMEA website shortly after the conclusion of day 210 meeting but does not include any of the detailed information that goes to the EC. At day 300 or approximately 90 days after the CHMP recommendation to the EC, the EC makes a final decision regarding granting of a license based to a large degree on the CHMP recommendation. The European commission can adopt, revise, or reject the CHMP recommendations, although the latter is unusual. The EC will issue a European Public Assessment Report or EPAR that does detail many of the specific recommendations for the product including labeling.

If a decision is made to grant a marketing authorization at day 300, European Commission produces a decision approximately 30 days thereafter, which is valid throughout the European Union and the European free trade association, which includes Switzerland, Norway, Iceland, and Liechtenstein. Adoption of the marketing authorization on a country-by country basis will occur once pricing and reimbursement have been agreed to between the applicant and individual member EU state. A community marketing authorization is valid throughout the whole of the European Union and is usually given for five years and is renewable.

We realize that there has been some speculation in the analyst community regarding where Exubera is in this process. However, we want to make clear that neither Pfizer nor Sanofi-Aventis have provided any specific information as to where in the process this product is other than to say it's actively proceeding which they said most recently on April 19, 2005. Although we focused on Exubera today we would also like to point out that our partners expect to advance several Nektar improved products through the pipeline in the next 18 months.

First, UCB Pharma has indicated they expect to file for CDP-870 for the approval of Crohn's disease in 2005 and for rheumatoid arthritis in 2006. They also recently announced the new global brand name of Cimzia for CDP-870. They're also pursuing CDP-791 for cancer and CDP-484 for rheumatoid arthritis. Although they have not yet advanced these two products beyond Phase I.

Second, Chiron has indicated they plan to initiate Phase III trials for inhaled Tobramycin in 2005. Third, Roche has indicated they anticipate Sierra (ph) going into Phase III trials for oncology this year in addition to the current Phase III trials for renal anemia. And fourth, Eyetech has indicated they anticipate Macugen beginning Phase III trials for diabetic macular edema this year. So we can expect some additional Nektar improved products to advance towards filing and launch within the next year or two.

I'll now turn the call over to Ajit.

Thanks. On our last conference call, we spent some time telling you about our proprietary product strategy. We explained that we have four products in development including two that have entered the clinic. These four products as well as others in earlier stage development continue to be a key focus for us. We realize that without identifying these products we have not provided you information to enable you to value this program. To that end, we plan to hold an Analyst Meeting in New York during September, most likely during the week of September 19 at which time, we will discuss in much more detail the logic, progress and specifics of our proprietary programs.

In addition, we will introduce you to some of our management leading the proprietary products program. We will be sending out invitations for that meeting once we have confirmed the date and venue. For Nektar, we expect that Exubera and our existing partnered clinical pipeline will take us to profitability and provide significant growth over the next five years. To maintain significant growth on top of that revenue base, we will rely to a large degree on our proprietary products. The reason we decided to begin investing in proprietary products several years ago is based on the lead-time required to get new products to market.

Because we have invested in developing leading edge technology and pulmonary PEGylation over the last ten years, we are in a unique position to capitalize on our circumstances by applying that technology to existing molecules to develop our own proprietary products. This should result in a lower risk business model than typical biopharma companies yet provide a highly differentiated pipeline. If we were to decide to take any proprietary products to market ourselves, it could provide the revenue and profit potential comparable to what we might receive Exubera.

In summary, we are very excited about Exubera's progress and although we understand that we are still not at the end of the road, the acceptance of the filing by the NDA was a key milestone achievement along that path. Secondly, our partners continue to move the Nektar improved products through the pipeline. And finally, we look forward to sharing with you some of the details of our proprietary products by time in September.

With that, I'll now turn the call over to all of you for questions. Operator, would you please poll the participants for any questions?

Yes. Thank you, sir. We will now begin the question and answer session. If you have a question, you will need to press "star" then "one" on your touchtone phone. If you wish to be removed from the queue, please press the "pound" sign or the "hash" key. If you are using a speakerphone, you may need to pick up the handset first before pressing the numbers. Once again, if you have any questions or comments, please press "star" then "one" on your touchtone phone. Our first question comes from Burt Hazlett from SunTrust. Please go ahead.

Yes. Thanks for taking the question. Should we expect additional -- the margins to be roughly the same on the commercialization readiness revenue throughout the remainder of the year, and should they be consistent going forward? And secondly, why the general silence on the program in the States -- on Exubera in the States? Thanks for your comments. Thank you.

Ajay, you want to take the first part; Chris, the second?

Yes, I'll take the first part of the question. The margins on the Exubera commercialization readiness revenue should be roughly in the same magnitude as you see them today, and overtime you would expect that these commercialization readiness revenues to actually decline.

Burt, in terms of, sort of, communication of Exubera in the US, I think that was your question, first of all, Pfizer and Sanofi-Aventis will provide the detailed updates on that program, if any. So you really should probably ask that question of them. But I'll also point out it's early in the filing process. It was just accepted in early March of this year, and at this point, I don't think we would expect to see a lot of news flow for a typical product.

Okay. Thank you.

Thank you. Our next question comes from Rich Silver from Lehman Brothers. Please go ahead.

Yes. The question was answered. I'll get back in the queue. Thanks.

Thank you. Our question comes from Howard Buznitsky (ph) from BNY Capital Markets. Go ahead.

Yes, thank you. I didn't catch your revenue guidance. I only caught part of it. Can you repeat that please?

Sure. We said that our total revenues for the year we expect to be in the range of $120 to $130 million, and we provided further breakdown of those revenues in three categories. We indicated that on contract research revenues we expect to be in the range of 75 to 80 million. We expect our product sales and royalty revenue in the range of 30 to 35 million, and then 10 to 15 million in commercialization readiness revenue.

Ajay, is this similar guidance as you -- I don't recall the guidance you gave in the last conference call. Is this similar?

Yes, this is unchanged from the guidance provided regarding '05 revenues in March -- earlier in March.

Okay. Thank you very much.

Thank you. Our next question comes from Jeff Goater from SG Cowen. Please go ahead.

Hi. It's Ian Sanderson from SG Cowen. On Macugen, can you just talk a little bit about the timing of when you'll start the book royalty revenues from that or should we assume that there's probably a one-quarter lag there?

On the Macugen royalties, your assumption is correct, Ian. We will have a one-quarter lag in terms of royalty recognition. And as we have earlier spoken to, our royalties are in the low to mid single digits, and a portion of those royalties are shared with Enzon, but they would be a lag of one quarter.

Okay. And also, can you update us on the three-product collaboration with Enzon if anything beyond Lupalite (ph) has moved into the clinic?

Yes. Ian, this is Chris. At this point we're not in a position to give any update on those specific programs.

Okay.

And we would anticipate doing that at some point in time in the future.

Okay. Thank you.

Thank you. Our next question comes from Stanley Grossman (ph) from Rudman Capital. Please go ahead.

Yes. Thank you for taking the question. With the Exubera you did a two-year safety study. Was there any evidence of pulmonary dysfunction?

I think you're referring to last year there was a presentation at the ASD of a two-year safety study that Pfizer and Sanofi-Aventis had presented.

Yes.

And you should refer to them for the specifics. But essentially, the conclusion was there was no difference in pulmonary function between the controlled group and inhaled group at two years.

Well, thank you.

Thank you. Your next question comes from Rich Silver from Lehman Brothers. Please go ahead.

Is there any updates on the restatements from third quarter of '02 through third quarter of '04?

Any update on the restatements? Yes, just to remind everybody, we had a restatement in March of last year where we had restated the gains that we had recognized from debt exchange transactions. Then earlier this year we had restated -- reclassified some of our R&D expenses, some of our expenses from R&D to G&A, and amortization of that issuance cost from G&A to interest expense. At that stage we had indicated to you that as a result of these restatements, we have concluded that we have a material weakness in our GAAP interpretation and disclosures and that a key element in addressing that weakness was hiding of additional expertise within the company, specifically related to technical accounting competence. At present, we are looking to fulfill two key positions in that regard. We are looking to hire a Chief Accounting Officer and we are also looking to hire a Director of Accounting, and including efforts for both those positions are in full swing. As of yet, we have not concluded that we have remedied this material weakness.

One more question on the Exubera commercialization readiness revenue. The guidance that you gave, is that -- are we going to see that revenue throughout the four quarters or should we assume that it's more front-end loaded and by, maybe, the fourth quarter there are zero revenues for -- on the readiness front, and at that point, perhaps, we'd actually see some commercial revenues?

This is, I think, the revenue guidance provided of 10 to 15 million regarding Exubera commercialization readiness. As we had stated and just to repeat on that, we expect to receive this revenue and this is for reimbursement of certain agreed upon operating costs relating to our drug manufacturing facility in preparation for commercial production. So, I think directionally, I think your conclusion is correct, which is, as we start moving more and more into commercial production, then the readiness -- the commercialization readiness revenue will begin to decrease. For your planning purposes for this year, it's reasonable to assume that the revenue from quarter-to-quarter will be roughly the same. There will be some modest decline hopefully, but you should assume that the revenues for this year would be roughly the same on a quarter-by-quarter basis.

And Rich, the first was approximately 25% of the full-year guidance -- sort of the low end of the full-year guidance. So it will probably will continue relatively flat. Okay?

Thank you.

And your next question comes from Jim Reddoch from Friedman Billings. Please go ahead.

This is David Amsellem for Jim Reddoch. Just a quick modeling question. How much of cost of sales per order were one time and should we -- should we look at some portion of that 5 million as a one time and is it -- and to what extent will it be lumpy for the remainder of the year? Thanks.

As you would recall, gross margins in the first quarter of '04 were significantly higher and you would also require that gross margins in the fourth quarter of '04 were around 22%. And the gross margins, we have reported in the first quarter of this year are 18%. So our expectation is that the gross margins would improve some. There is some element of one-time cost in those high cost of sales. Our expectation is that a gross margin for the year would be in the range of 25 to 30%.

Okay. That's great. Thanks.

Your next question comes from Fariba Ghodsian (ph) from D3 Capital. Please go ahead.

Yes, good afternoon. Could you tell us which abstracts will be presented at the upcoming American Diabetes Conference with regard to Exubera?

Yes, it's Chris. The abstract typically gets published about a month before the ADA meeting and that's the first time they come into public domain. And there's no comment by Pfizer or Sanofi-Aventis in terms of what if anything they plan to present at the American Diabetes Association, meeting although they have historically year-over-year presented a number of different studies at that meeting.

All right. Thanks.

And your next question comes from Stanley Grossman from Rudman Capital. Please go ahead.

Just a follow up. Two questions. One has that safety study been continued, that two-year safety study I asked about?

Our understanding was that initially a six-year study that was extended to look at long term.

Six months.

I'm sorry, six months study extended to look at two years to look at safety and that concluded from our understanding, yes.

So that stopped really. Okay. And the Exubera, has there anything been done in terms of making it more absolvent into the lung tissue, into the bloodstream? Has it become more efficacious at all?

I think you're referring to sort of the efficiency and the technology for that product really goes back several years and we're continuing to develop the product that has been defined several years ago as it relates to the product that's been filed.

Yes.

That's what I think you're referring to. And whatever data that you're referring to in terms of overall efficiency, that's not likely to have changed just because that product, the technology network was locked several years ago.

Right. It's about 10 to 1 efficiency.

Yes.

Thank you very much.

Right. Now, at the same time you know that the efficiency doesn't really impact the overall efficacy of the product?

Right.

And that's clearly something that if Pfizer chose with us at a later date to improve it, it certainly would be an option. But we need because of the development of that product you need to fix your formulation during phase -- the later Phase II which for us was in 1997. And clearly if that was something that was important to our partners, that would not -- that was something that, you know, we could go ahead and improve further on if that was necessary.

Right. Thank you.

Thank you. The next question comes from Jeff Goater's location from SG Cowen. Please go ahead.

Hi, it's Ian Sanderson, again. And this is a question maybe out in left field, but is there anything going on at Bradford Particle Design anymore?

Yes, we continue to, you know work on the Bradford technology. When we first acquired it what we had -- told everyone that was by far much earlier stage technology than the other technology platforms that we had. And a little over a year ago, we decided to focus that technology on a few a very specific applications. It was a technology that at the time initially people felt had lots of applications and after some analysis, we just decided to focus it very specifically on a couple of applications. And that work is ongoing. And you know, as and when we get to a point where we have something additional to report, obviously we'll come back to you with that.

And Ajit, are those just internal programs at this point?

You know, those are internal programs because part of the challenge, because this was very much a manufacturing technology.

Right.

Part of the challenge was manufacturing folks want something that is proven and so there's somewhat of the chicken and the egg. And so we decided the best thing to do is focus on sort of the highest value applications where the FPF technology made the greatest difference and just apply it to -- use molecules that we could get access to ourselves and work with those. And thereby demonstrate the value of the technology.

Okay. Thank you.

Sure.

Once again, if you have any questions or comments please press "star" "one." Mr. Gill, we have no further questions at this time.

Okay. In that case I'd like to thank all of you for attending this conference call and we'll see you I guess at the next conference call. Thanks, bye-bye.

Thank you. Ladies and gentlemen, this concludes the Nektar conference. You may all disconnect and thank you for participating.