Nektar Therapeutics (NKTR) 2005 Q3 法說會逐字稿

Good afternoon, ladies and gentlemen, and welcome to the Nektar [inaudible] call. [OPERATOR INSTRUCTIONS] I would like to turn the call over to Mr. Ajit Gill. Mr. Gill, you may begin.

Thank you, Operator and welcome everyone to Nektar Therapeutics conference call and webcast to review our performance for the third quarter 2005. I'm Ajit Gill, President, 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 strategies, future products, product and technology developments, funding, collaboration arrangements, clinical trials, manufacturing scale up, information about a product candidate which us under review by the FDA and the European medicine evaluation agency 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 31st, 2004, and our subsequent quarterly reports on 10Q. Actual events could differ materially from these forward-looking statements. We assume no obligation to update any forward looking statements as a result of new information of future events or developments.

I would like to remind you that the web broadcast of this conference call will be available for replay through November 17, 2005, 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.

The past few months have been very eventful for us at Nektar; we saw seven noteworthy events happen for the Company including progress of Exubera in the U.S. and Europe, the convertible financing and reduction of our 2007 debt, the acquisition of Aerogen, Investor Day and disclosure of our due lead proprietary products, a new partner deal with Baxter and the initiation of phase III clinical trials for inhales tobramycin product with our partner Chiron. Each of these events is an important milestone as we evolve our business from a technology based licensing business to a products based business and profitability. I would like to touch on each briefly.

First, Exubera is now in the important step closer to commercialization in both the E.U. and U.S. As part of the European process, the next step should occur in the January time frame at day 300 or approximately 90 days after the CHMB recommendation to the E.C. This is when the E.C. makes the final decision regarding granting of a license based to a large degree on the CHMP recommendation. In the U.S., FDA notification should also occur in the January time frame based on the recently announced three month extension for review.

With regards to the FDA's request for an additional three months to review Exubera, we don't think this is surprising since, as Pfizer and Nektar have characterized many times, Exubera is a first in class product that involves multi-divisions at the agency and would potentially involve millions of patients. According to Pfizer, this is the most complex filing that they have ever made. Therefore it is not unreasonable that the agency might need more time than for a less complex product.

We continue to be confident about Exubera reaching the market and making a major contribution to diabetes treatment, as we continue to see evidence of the need for a product like Exubera. The CDC recently said that the number of diabetes patients in the U.S. is 21 million which represents 7% of the U.S. population. In Europe approximately 22.5 million people suffer from diabetes with type 2 diabetes accounting for 85 to 95% of all diagnosed cases.

Second, the convertible debts financing we completed in October puts us in the position to deal with our 2007 outstanding debt and should enable us to reach profitability with no additional financing but under the variety of operating scenarios.

Third, our acquisition of Aerogen increases our competitive position for our ICU antibiotics program as well as strengthens our leadership position in pulmonary delivery by broadening our delivery platform.

Fourth, we disclosed two high value proprietary products that are in clinical trial that are uniquely enabled by our technology and expertise and exploit the concept of lung targeting. All of these products: inhaled [inaudible] for the prevention of pulmonary [aspitulosis] and inhaled antibiotics for the prevention of ventilator associated pneumonia address a serious unmet need and have the potential to reduce patient morbidity and mortality.

Fifth, the new Baxter agreement for hemophilia aid represents the value we can attain from our base technology by focusing on product application, as we were able to capitalize on the internal work conducted as part of a proprietary products program.

Last, the initiation of phase III trials for the tobramycin inhalation powder with Chiron is the first program to enter late stage clinical testing using our novel [autotized] device. The first program for local lung indication and our second pulmonary product to reach late stage clinical testing.

In summary, the events of the past few months have enhanced our position to grow Nektar. Now I would like to ask Ajay to review our financial performance and Chris Searcy will then follow with an overview of our partner and proprietary pipelines and then I will make concluding remarks prior to responding to your questions.

Thanks, Ajit, and welcome to all of you on the call. I would like to briefly review our third quarter financial results and then I will review our guidance for the full year 2005 and make some brief comments about a longer term operating margin guidance that we have discussed at investor day.

First, let us review revenue for the third quarter. For the third quarter 2005, we reported revenue of $36.4 million, an increase of approximately $8 million over the same quarter last year. This increase in revenue of $8 million was due largely to Exubera commercialization readiness revenue and increase product sales and royalty revenue. For the third quarter 2005, we reported contract revenue of $23.7 million which was similar to contract revenue of $23.6 million in the third quarter of 2004. For the third quarter 2005, we reported product sales and royalty revenue of $8.5 million versus product sales and royalty revenue of $5 million in the third quarter of 2004. And finally, for the third quarter 2005, we reported Exubera commercialization readiness revenue of $4.2 million.

Let us now turn to our loss from operations. Our third quarter 2005 loss from operations was $23.4 million versus $18.8 million for the same quarter last year. This increase is due to increases in R&D expenditures for proprietary products and increase in G&A expenses.

Let us turn now to net loss. We reported a net loss of $23.8 million or $0.28 per share in the third quarter of 2005 versus $20.5 million or $0.24 per share in the third quarter of 2004. We ended the quarter with approximately $620 million of cash, cash equivalents and short-term investment. This includes the proceeds from the sale of $315 million of convertible notes due 2012.

We also reduced our convertible debt during 2007. Our convertible debt position is as follows. Our 2007 convertible debt stands at $103 million down from $174 million. And we now have convertible debt of $315 million due in 2012.

Let us now turn to our guidance for 2005. Our guidance is unchanged from the guidance we provided at our Investor Day on September 29. Please note we are still excluding the impact of Aerogen acquisition from this guidance. Our guidance for 2005 is as follows. Revenue of 120 to $125 million, net loss of 110 to $120 million. And year end cash of greater than $535 million.

We also provided information on our projected longer down financial picture at our Investor Day. Since then, many of you have asked for clarification on potential operating margins four years after Exubera launch. We anticipate that four years following [broad] Exubera launch our annualized revenue run rate will be between 650 to $800 million. At the Investor Day we also said that we expect operating margins in the range of 20 to 25% as at that time we will be in the process of launching a proprietary product and that is going to affect our operating margin. We also said that as our proprietary product revenues ramp up, those margins should improve nicely. We expect that our longer term operating margins would be similar to other companies in our field approximately 30 to 35%.

In summary, while this is many years out, we plan to run our business to achieve long-term margins similar to other specialty pharma and drug delivery based product companies.

I will now turn the call over to Chris Searcy who will discuss Exubera and our other programs including a summary of our proprietary products.

Thanks Ajay. First I want to also re-iterate the past few months have been especially eventful due to a number of milestones that were achieved. Let's look first at Exubera as it certainly has been in the news lately. First, on September 8, the FDA advisory committee recommended approval of Exubera. The FDA is not obligated to follow the advisory committee's recommendation but usually does so. On October 13, the CHMP issued a positive opinion recommending approval of Exubera in Europe. Based on the positive review panel on September 8 and the recommendations of CHMP on October 13th, we continue to be confident about Exubera reaching the market in the U.S. and Europe and thereby making a major contribution to diabetes.

With regard to the FDA extending its original review period for Exubera by three months on October 28, as Ajit said, we do not believe that this is a particularly surprising extension, given that it's a first in class product, involves multiple divisions at the agency and will potentially involve millions of patients.

We anticipate the next steps for Exubera in the E.U. would be approval and then in the U.S. a response to the filing. In Europe, at day 300 or approximately 90 days after the CHMP recommendation to the E.C., the E.C. makes a final decision regarding granting of a license based to a large degree on the CHMP recommendation. European commission can adopt, revise or reject the CHMP recommendation, although the latter is unusual. The E.C. will issue a European public assessment report, or EPAR, that details many of the specific recommendations of the product including labeling.

If the decision made to grant marketing authorization at day 300, the European commission issues a decision approximately 30 days thereafter which is valid throughout the European Union, in the European free trade association, which includes Switzerland, Norway, Iceland and Liechtenstein. Adopting of the marketing authorization on a country-by-country basis will occur once pricing and reimbursement has been agreed to between the applicant and the individual E.C. -- E.U. member state. The likely result of reimbursement and pricing negotiations is that Exubera will be introduced in the E.U. in a staggered fashion depending on the successful outcome of those discussions.

An important step is, of course, preparing for commercialization. Nektar's role in the splice supply chain will include the manufacturer and shipment of two key components: powdered insulin and the inhaler device. Nektar will produce powdered insulin by applying a proprietary formulation and spray [rind] to the bulk insulin we receive from Pfizer and Senovia Ventis' plant in Frankfurt. We have scaled up our spray dry capabilities over the past few years to handle commercial production. Nektar also manages two contract manufacturers who produce the devices including Best Pack in the U.K. and Tech Group in Phoenix. Both groups have been developing manufacturing processes for several years and are continuing to grow their teams to meet the expected demand for Exubera devices.

I would like to switch now to discussion of our proprietary products. We were pleased this last quarter to discuss with you our two lead proprietary product programs. Both of these programs focus on acute indication to prevent one diseases that carry a high incident of morbidity and mortality. By targeting the lungs directly, we believe we can both improve the effectiveness of the therapies and also minimize or eliminate systemic side effects. Each of these product is expected to be filed for approval in the 2009 time frame and generate revenues ranging from 400 to 600 million for [ampicteracyn] and 250 to 400 million for ICU antibiotic at peak year sale.

I would like to share a few more details for each program. Inhaled amphotericin B is the lead product in our proprietary pipeline. It is being developed for the prevention of fatal pulmonary infections in uni-compromised patients, namely pulmonary [aspiderlosis], to reduce the incidents of morbidity, mortality and high cost of treating these infections. More than 150,000 patients annually in the U.S. and Europe are at risk of developing often fatal and costly fungal infections in the lung. In addition to patients who have had bone marrow or stem cell transplants ,organ transplants or chemotherapy for hematological malignancies, patient with certain genetic diseases, late stage AIDS with the associated neutropenia and aplastic anemia are also at significant risk for pulmonary [aspiderlosis] infections. [Aspiderlosis] and immunocompromised patients have a mortality of approximately 50% and although newer treatments have improved side effects they're still only about 50% effective.

Studies show that the treatment cost is significant. A study published by [Doshback et al] in 2000 reported for cancer leukemia patients a secondary diagnosis of [aspiderlosis] resulted in a 26 day longer hospital stay, $115,000 more in total costs and four times the mortality rate. We anticipate regulatory filings with inhaled amphotericin B in early 2009 with pivotal trials beginning in early 2007.

The second product we announced is inhaled ICU antibiotics that we are developing for the prevention of ventilator associated pneumonia in the intensive care unit. Ventilator associated pneumonia is a form of hospital acquired pneumonia occurring in patients on mechanical ventilators. We believe there are approximately 1 million at risk ventilated patients in the U.S., E.U., and Japan that could benefit from this therapy.

Diagnosis of ventilated associated pneumonia can add up to $40,000 in extra hospital costs per patient in the ICU. Current therapies with intravenous antibiotics that have response rates between 30 to 70% depending on the study and result in prolonged days on the ventilator, days in the ICU and days in the hospital. Like pulmonary [aspiderlosis] we believe that preventing the disease is better than treating it due to poor outcomes seen with treatment. Prevention using intravenous antibiotics is problematic due to systemic side effects of these drugs and concern over development of resistance due to increased use of intravenous antibiotics. Our solution to the problem is to prevent the infection by targeting the lungs with the antibiotics for gram negative and gram positive organisms. Our technology enables us to efficiently and reproducibly deliver drug to a patient on a ventilator across the broad range of ventilator types and setting. We completed a proof of concept study [inaudible] for this implication, plan to initiate phase II trials in mid-'06, with an expected filing in late 2009.

By the end of 2006, we anticipate the following milestones will have been achieved for proprietary products. The completion of the inhaled amphotericin B dosing studies in preparation for pivotal trials. The initiation of the Phase 2 confirmation studies for inhaled ICU antibiotic by mid year. And an additional program entering the clinic.

We also saw progress during the past few months in our partner pipeline. We announced the agreement with Baxter to develop a long acting PEGylated formula recombinant factor A product and other blood clotting proteins to treat hemophilia A. Baxter's a leader in the hemophilia market -- a market that extended 3.8 billion worldwide in 2004. This agreement is important because it brings Nektar substantially better economics than our old PEG[hout] collaborations. The better economics come primarily because of the early work we did on factor 8 molecule in-house but also because we are able to capitalize in the proven success of our mature PEG technology to extend block buster franchises. Nektar could receive up to 100 million milestones, R&D payment and manufacturing revenues. In addition, we will get product royalties of up to 13% -- that's 1, 3 -- 13% this is versus royalty for older PEG deals that were in the low to mid single digit range.

Next in the partner pipeline Nektar and Chiron initiated clinical testing in phase III program evaluating tobramycin inhalation powder. An investigational inhaled antibiotic. This phase III program includes two clinical trials and will evaluate the efficacy and safety in the treatment of lung infections caused by Pseudomonas aeruginosa in patients living with cystic fibrosis. This therapy is designed to provide the first powder delivery of an antibiotic directly into the airway. Further, as Ajit said, this is our first program to enter late stage clinical testing using our novel pocket sized inhaler. First produce to treat lungs directly and the second pulmonary product in late stage clinical trials.

Next in our partner pipeline discussion UCNB announced details on one of the phase III studies for Cimzia formerly called CDPH-70 for Crohn's disease, a disorder that causes inflammation of the gastrointestinal tract. It's estimated that 1 million people suffer from Crohn's disease in the U.S. and Europe. Results of the 26-week study of 668 patients showed that Cimzia was as efficacious at decreasing or controlling the signs and symptoms of Crohn's disease. Administration via sub Q injection UCD Cimzia was also shown to be well tolerated. [Indiscernible] increases the plasma half a life of Cimzia to enable dosing once every four weeks. Both tobramycin inhalation powder and Cimzia represent late stage products which are expected to bring peak annual revenues of 25 to $50 million to Nektar. UCB says they expect to file Cimzia for Crohn's disease in both the EU and U.S. in the first quarter of 2006. [Hira's] obramycin inhalation powder which is just started phase III trials is expected to be filed for approval sometime in 2007.

A third partner product in late stage development expected to bring this annual revenues of 25 to $50 million in Nektar to Roche's CERA which is expected to file in 2006 for renal anemia. In addition, Roche plans to start phase III trials for cancer sometime this year.

So looking ahead to the end of 2006, if you combine our expectations for Exubera, our partner pipeline and proprietary pipeline we could see Exubera launched or --- and being used by diabetic patients in Europe and the U.S. and two additional key partner products, Roche's CERA, UCB Cimzia filed for approval, and inhaled amperterocyn B ready to start phase III pivotal trials, inhaled ICU antibiotics in phase II trials and a new proprietary product entering human testing. So with that bright picture in mind I would like to turn the call back to Ajit.

Thanks, Chris. In conclusion, we have a great opportunity to grow Nektar into a successful business. Exubera is moving toward approval and launch. We plan to be profitable and that's excluding option expensing within four quarters following Exubera launch in the U.S. and major European markets. In addition to partner products already on the market, we have three others in late stage development that will each provide between 25 and $50 million a year peak sales to Nektar once they are launched. It is also important to remember that our proprietary products are key to a long term growth. Nektar pulmonary and ventilation technologies enable unique opportunities and these opportunities lead to products with an outstanding risk reward profile as we seek to improve already known and approved molecules with our test of technology and we provide excellent return on investor by developing highly differentiated therapeutics at approximately one-third the cost with three times the success rate of new chemical entity. As consequence, we are really excited about 2006 and look forward to another year of progress.

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

Yes, sir, thank you. [OPERATOR INSTRUCTIONS] Our first question comes from Rich Silver from Lehman Brothers. Please go ahead.

Hello?

Hi, Rich.

How are you?

Good.

Just wondering as you look out to the '07, '09 period and you did say again re-iterated that you will be profitable within four quarters of full worldwide Exubera launch, not including option expensing. Can you give us some sense of the spending levels and how we should look at it once Exubera is out there and launched?

You know, Rich, there's actually a variety of scenarios that we could use to achieve profitability which gives -- in terms of spending levels that gives us a range. As we had said at our investor day, with the two proprietary products, we could achieve profitability by offering both of them by partnering one of them. Or keeping both of those products to ourselves. And that is in part going to be a function of how rapidly Exubera ramps up.

So if we partner neither of the two product, then clearly our expense rate will be higher, but it will be offset in that scenario by higher Exubera sales. On the other -- at the other end of the spectrum, if the sales ramp up somewhat slower, we have the option of partnering both of the proprietary products. In that scenario, those development expenses would then in effect be offset by contract research revenue.

The bottom line is that you clearly have a profitability growth trajectory in mind and you will be managing the expenses with that trajectory in mind as opposed to sort of in isolation.

Absolutely. I mean, it's one of the reasons why we touched briefly on the fact that we launched a [six signal] program within the Company, you know, we hired an expert in that area early this year. And the reason for that was --- thus far while we were primarily in development stage, the focus was get it done. Get the product developed. As we approached commercial operation, sort of having effective processes, low cost becomes absolutely critical. So we started an effort inside the Company to just examine exactly how our processes work and can we improve them and making a big push to improving them which ultimately should result in lower cost. So driving cost down is really important for us.

And as part of that, that's the reason why we also started to do some work in India where we set up a facility and we are looking at other ways to expand that facility in terms of what we do in India. Once again, doing stuff over there and we wouldn't sort of anticipate doing everything there. We currently outsource a bunch of stuff, for example, development of bio-assays, a variety of --- certain types of aerosol testing, tox work and a lot of these things could be -- can be done in a country like India at much, much lower cost. So we are looking at all approaches like that also as additional ways to reduce our costs.

One, just one follow-up on Exubera. Is Pfizer sharing with you the details behind the issue that has led to the extension? And I guess the second question is, and if so, do you get any sense of whether they would be using the full three months? Or might it be more likely to be less than that three month period?

Rich, it's Chris. In terms of your first question, are they sharing details with us? We do not know the details of their discussions between the agency and Pfizer in terms of how the review is going. Our role is to support that but we were not on the front lines so we don't know the details. In terms of what we will use the entire three months, our sense is that they have pushed off or sense is the statement is that they pushed off the review date for three months and we are anticipating that they will use the entire three months.

And I'm sorry, back to your statement about they -- that you are supporting them. So does that mean you are actually providing them with some data and maybe if there is additional questions that you are part of that Q&A process during this -- as far as the additional data that was submitted that's the subject of the extension?

No, Rich. It means that our role is to work with them in terms of helping them answer questions, but they have the database and they have done some of their own work and they have supplied the dossier. So they are responsible for responding to the questions. So should some additional data we generated, additional data is data that has been provided by us -- we presume has been provided by Pfizer based on their statement.

Thank you.

[OPERATOR INSTRUCTIONS] Thank you, we have a question from Andrew Forman from WR Hambrecht. Please go ahead. One moment, please.

Operator? Operator? Hello?

One moment, sir. [OPERATOR INSTRUCTIONS] Sir, please state your question.

Yes, hear me?

Now we can, sir.

I'm sorry. I'm on a cell phone in the car. How will you recognize revenue on Exubera? Is that going to be on the disposable and on the device? Will there be an up front revenue in front of the actual sale, say early in '06? Or is this something that will come each quarter where you will see blended royalty and product sales. Trying to get a sense of the accounting of the Exubera. Thanks.

From the revenue perspective, we will, of course, ship the devices and the process powder to Pfizer and based on the contractual agreements we have with them, a certain period of time after that we will be able to recognize revenues based on acceptance criteria, et cetera. With respect to royalties, the royalties will be paid to us after the quarter ends. So for the first quarter we will get paid in the second quarter and so on. And that is when we will recognize those revenues from an accounting perspective.

And follow-up, Chris, from your comments on Europe, I got the impression that formal approval in Europe seemed it could happen before the U.S., is that what you were trying to say or no?

No. What I was saying in the E.U. I think the process is -- the process is more defined in the sense that once you get a positive opinion from the CHMP, the expectation is that day 300 or about 90 days later that the E.U. will render an opinion. And the likelihood of the E.U. rendering an opinion that'g different from the CHP---CHMP recommendation historically has been very low and has mostly been due to logistic or legal as opposed to technical or medical technical reasons. I think the certainty around the timing in the E.U. is much clearer in terms of when we would expect to hear formally from them.

On the U.S. side, I think the timing based on their announcement towards the end of October also pushes that out to the end of January, at which time could be an approvalable -- I'm sorry, an approvable or denial. I think the certainty around the outcome of that is less because of the process that is different from what is in the E.U. in a different stage.

And the last question, Chris. On CERA [ipo] project with Roche, could you characterize that market a little better in terms of what Roche's [energy] is and how big that market is and what their expectations might be and at least in terms of the relative to Exubera.

Andrew, we haven't spent a lot of time looking at that market. We believe that it is represents to us someplace in the 25 to $50 million revenue range at peak year sales. Given the relative importance of that to our overall portfolio we haven't spent time characterizing that market. It's something better asked of Roche.

And the royalty rates vis-a-vis Exubera for that product is what?

What we have said in the past is that the revenues on CERA are in the low to mid single digits which include both royalties and manufacturing.

Thanks.

And we also guided that we expect our peak revenue in the product to be 25 to $50 million.

That's more of a function of low royalty than a low market potential from Roche's perspective?

That's right.

It's a blend of those two.

Thanks.

Thank you. [OPERATOR INSTRUCTIONS] Mr. Gill we have no further questions at it time.

That's it. I would like to thank everybody for joining us on this call. And we look forward to getting together with you all again by phone approximately three months from now. Thank you. Bye-bye.

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