Nektar Therapeutics (NKTR) 2006 Q3 法說會逐字稿

Good afternoon, ladies and gentlemen. Welcome to Nektar's third quarter financial results 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 will now turn the call over to Mr. Robert Chess, Chairman of the Board, Acting President, and CEO. Mr. Chess, you may begin.

Actually, this is Joyce Strand. Welcome to Nektar Therapeutics conference call and webcast to review our performance for the [second] quarter 2006. As I said, I am Joyce Strand, I am the Director of Corporate Communications here at Nektar.

Today you will be hearing from Rob Chess, who is Chairman and Acting President and CEO, Lou Drapeau, our Senior Vice President of Finance and CFO, and Chris Searcy, our Vice President of Corporate Development.

Before we get started, please note that the following presentation contains forward-looking statements that reflect our current views as to the Company's business strategy, future proprietary and partner prospects, clinical progress of our proprietary and partnered products, market potential for our products, collaboration arrangements, clinical trials, Exubera manufacturing activity, business strategy, competitive assessments, financial outlook for 2006 and 2007, and other future events 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, and most recent quarterly report on Form 10-Q. 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, or 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, 2006 on the Investor Relations page of 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.

I will now turn the call over to Rob Chess.

Thanks, Joyce. Today we would like to review the progress of Exubera, including Pfizer's phased launch in the U.S. In addition, we will highlight the key priorities of the Company through the end of 2007, as well as provide our preliminary 2007 performance estimates. I will conclude with an update on our CEO search. We will then open the call for questions.

First, let's look at Exubera. Since May Exubera has been launched in Germany, Ireland, the U.K. and most recently the U.S. In the U.S. Pfizer is doing a phased launch. What this means is that during 2006 Pfizer is focusing on educating physicians, mainly endocrinologists, and health professionals on Exubera. They are planning a broader raunch to general practitioners starting in January. I believe this is exactly the right strategy to maximize the long-term success of Exubera. Let me explain why.

First, Exubera is a completely new paradigm for treating diabetes. Physicians, diabetes educators, and healthcare professionals need to understand Exubera before they prescribe it to patients. Second, Exubera is a drug device combination. It is important that the right support structure be in place and tested with patients, before the product is widely used. Third, as Pfizer has mentioned, they have been working through some manufacturing scale-up issues on their end, that they want resolved before a broad launch.

Finally, Exubera has 3 to 4 years before other inhaled insulin products come to market, assuming our competitors can successfully navigate the clinical, regulatory and manufacturing scale-up challenges, required to bring an inhaled insulin product to market. This 3 to 4-year lead is unusual in today's biopharmaceutical environment. According to a recent study by McKenzie and Company, the average new drug has only one year before it sees serious competition.

This long lead time for Exubera allows our partner the time to introduce Exubera right. While this is frustrating to many of you who are tracking weekly prescriptions, that Pfizer is focusing on education of specialists, we believe their thoughtful, well executed phased launch will pay major dividends long into the future. A good measure of Pfizer's confidence in the success of Exubera is the orders they are placing with Nektar for inhalers and powders. In September, we started manufacturing powder 24 hours a day, 7 days a week.

We are pleased to report that we are increasing our estimates for Nektar's revenue for Exubera for 2006, to 90 to $100 million, from 70 to $90 million. The vast majority of this revenue is from manufacturing sales to Pfizer. In addition, we are estimating that Exubera revenues for 2007 will be in the range of 110 to 130 million, with the majority of the revenue coming from manufacturing sales to Pfizer.

Please note that since our per unit manufacturing costs will likely be lower next year, this represents more than a proportional increase in the number of inhalers and amount of insulin powder. We are not yet separating royalty from manufacturing revenue in our 2007 estimates. We have been conservative in our estimate of royalty revenue, since we do not yet know the ramp for Exubera sales.

Also I would remind you that we received royalty revenue one quarter in arrears, so 2007 royalty revenue will only reflect product sales through the third quarter. It has been gratifying to us here at Nektar to see Exubera receive recognitions for its innovation, to bring a better therapy option to diabetes patients. The Wall Street Journal awarded Exubera First Place in the Biotechnology Medical category as a technological break through.

Exubera was also named the Most Innovative Diabetes Medicine of 2006 in Germany, and was voted the Best New Approved product at the Biotech Meeting of CEOs sponsored by Burrill & Company and Kleiner Perkins Caulfield & Byers in Laguna Nigel, California. A very high priority here at Nektar is the lifecycle management of Exubera. Although we cannot discuss what the next version of Exubera will look like, given that its proprietary to Pfizer, we at least want to communicate we are pleased with its progress.

Our founder John Patton is heading up this effort, as well as all of our diabetes initiatives, as we plan to continue to be a leader in inhaled insulin for a long time to come. While Exubera is an incredibly exciting opportunity, we are more than an Exubera company. For longer term growth and sustainability we are developing proprietary products, and we have also made progress with these products.

We are pleased to announce today that our recent clinical end of Phase II meeting with the FDA regarding Amphotericin B Inhalation Powder was very encouraging. The FDA concurred with our plan to move the product into pivotal trials, and they are not requesting any additional clinical or preclinical studies, before proceeding into pivotal trials.

Inhaled Amphotericin has received Orphan Drug designation in both the U.S. and the E.U., and has been Fast Tracked with the FDA. The inhaled Amphotericin product leverages our existing anti-infective platform, and has the potential to prevent a deadly disease aspergillosis, that begins in the lungs and kills more than 50% of immune compromised patients with this disease.

We estimate there are approximately 150,000 patients in the U.S. and E.U. at risk of getting this disease each year, which represents a several hundred million dollar opportunity for the product. Similarly, we discussed with you last quarter that our clinical development plan for inhaled Amikacin was reviewed by the FDA, and we are also encouraged by their reaction to this product.

We are working out next steps for this program which include additional Phase II studies, based on feedback from the FDA meeting. As we said on last quarter's call, we are seeking partners for both our lead pulmonary and anti-infective proprietary programs. We expect to sign partner agreements some time next year.

Our other two products are both PEGylated products. One is in the oncology field, and one is being developed for a pain related indication. You will hear more about the oncology program in the coming months, when we initiate Phase I trials.

If all goes as planned, in 2007 we will have four of our own products in the clinic, and by the end of next year we should have one in Phase III, two in Phase II, and one in Phase I. We believe this is an excellent pipeline, given we initiated our proprietary products effort only three years ago.

I would like now to turn the call over to Lou to briefly discuss our financial performance.

Thanks, Rob. Again, following our new process, I am not going to review all the details of our financial results announcement, which you can see in our press release materials. However, there are a few things I would like to point out. If I miss something that requires clarification, please ask me at the end of our prepared remarks during the Q&A period.

First, I wanted to note that our Exubera revenue for the first nine months was 62.5 million, most of which is product revenue. I also want to point out that the improvement in our net loss estimates for 2006 of approximately 5 million, is largely due to increased margins, and R&D spending that is coming in less than planned.

With regard to our preliminary financial guidance for 2007, I want to reiterate what Rob said. These are early estimates, and for that reason we have made what we believe to be conservative assumptions at this time. We are providing them at this stage in response to many of your requests, to help with modeling for this coming year.

These early estimates assume that in 2007 our total revenue will grow by approximately 15%, to somewhere in the range of 210 to 250 million. Our early outlook for Exubera revenue represents mostly manufacturing revenue, and is within the range of 110 to $130 million. Projected non-GAAP net loss of 75 to 95 million, assumes that we will partner our two lead proprietary products in the second half of next year. We expect to continue our work to better focus our business, and will make further announcements next year regarding the actions to achieve this focus.

For the purposes of this initial guidance, we are anticipating that the benefits of these actions will not be realized until the second half of next year. Therefore, any reduction in net loss will not likely occur until the third and fourth quarters of 2007. A goal for Nektar is to manage the Company to sustainable profitability.

As we've said before, we believe we can achieve profitability in 2008, with a good Exubera ramp, that is moving toward the 2 billion of Pfizer Exubera sales in 2010. We have been asked several times what level of Exubera sales are needed to reach profitability, so we would like to provide you with greater specifics. The key for Nektar to achieve profitability, will be Pfizer reaching Exubera annual sales of approximately half the target 2010 number, about $1 billion, plus us making good progress in the rest of our business.

With the broader launch of Exubera now scheduled for early 2007, we will find out more next year on the ramp, and whether we will be at a sales level in 2008 to achieve profitability that year. While we are all awaiting to see how the initial sales next year ramps, our confidence in the success of the Exubera, and it becoming a multi-billion product remains strong.

I will now turn the call back to Rob.

Great. Thanks, Lou. First I would like to review the status of our CEO search. As I mentioned in September at the UBS conference, we came very close to hiring a new CEO this summer, who for no reason connected to Nektar decided at the last minute not to accept the position. Unfortunately we had to reinitiate the process to develop a new group of candidates.

The pool of candidates I am now interviewing is deeper than the one I reviewed earlier this year. If we go forward with one of the current crop, I would expect we would be able to select someone by the end of this year, otherwise it would be early next year.

In summary for this call, we are pleased with the progress in executing the plan we laid out early this year. We have advanced our proprietary product pipeline, significantly increased our manufacturing output, to meet the increase of orders from Pfizer, and are continuing to focus our business in-line with our goal of achieving sustainable profitability. Our optimism about Exubera, and the process of Nektar more broadly, are as strong as ever.

With that, I would like to conclude our prepared remarks and ask if any of you have questions. Operator, please poll for questions.

Thank you. [OPERATOR INSTRUCTIONS] The first question comes from Rich Silver from Lehman Brothers. Please go ahead.

Good afternoon.

Hi, Rich.

Hi, Rob. I was wondering if maybe you could elaborate a bit more on the spending increase next year, and whether you planned to actually start those additional trials on the two lead compounds on your own dollar, before partnering and offsetting some of the costs with a partnership.

First off I want to tell you, actually our spending guidance for next year is less than Nektar did this year. Our guidance for this year, Lou, you might get the numbers for this year. I think non-GAAP is --

Non-GAAP was 95 to 110.

And next year is 75 to 95 non-GAAP. Actually, Rich, the numbers are less for next year.

Okay. I think it was maybe relative to our estimates. Sorry about that. Just to answer my question, are you planning to start those trials on Amikacin and Amphotericin B on your own, and then partnering?

That's a good question. We are still assessing that right now. Our assumption right now for partnering is that the partnering happens in the second half of next year. Obviously it could happen earlier.

We are assessing right now whether we want to get started in either of those cases. In one case, it would be follow-on Phase II. The other one, it would be the pivotal trial before we start partnering, because part of it is we want to make sure that we have got partner buy-in for whoever we sign up, before we actually go forward.

Okay. Second question is you mentioned that most of the revenue on Exubera in '07 is manufacturing sales. Can you give us some sense of what most means? Here you are for '08 willing to provide a sales number that would equate to profitability, but no estimate for '07.

Yes. For '07 it is a little early for us to do that. One, as you know, we don't break out specifically royalty and manufacturing at this point. It is a little early. As you know, we normally provide guidance at our first quarter call. We wanted to provide people some early guidance to help you with your modeling, but it is a little early to know.

We don't have visibility into what Pfizer's specific sales forecasts are for next year. We do have visibility obviously on the manufacturing forecast, because that's what we need to produce for our business, so it is much easier for us to estimate that portion than the royalty portion at this point.

So if most is let's say, greater than say 60 or 70%, it certainly would seem like that is a very conservative estimate for end product sales backing into that number.

Clearly we can't give you any specific help since we are not going to break out what most means at this point. As I say, we really don't have a good feel at this point, as I don't believe anyone other than Pfizer does at this point, exactly how the ramp is going to go next year, so we have taken the viewpoint of being fairly conservative, and we will monitor how it goes during the year.

Okay. Thank you.

Next question comes from Hari Sambasivam from Merrill Lynch. Please go ahead.

Yes, thank you. Rob, just a quick couple of questions on the launch so far, and I know that Pfizer has been educating, you know, the endocrinologists and specialists on the use of this product, et cetera, but I am just wondering, in terms of the adoption right now, why is the adoption relatively low compared to some of the other specialist launches that we have seen?

For example, we've seen the launches of say Lantus, which was a highly anticipated product. We have also seen Vieta. And I know there is always differences in terms of sampling, and so on and so forth, but are there any other fundamental underlying reasons why this one might be different?

I think first of all, we are very pleased with the strategy that Pfizer has taken. As they said, they are very specifically focused on education this year. I think that is the key thing. Their focus has been on educating the communities, setting up their infrastructure. It has not been on prescription generation. I think they have talked about that in their call.

I think their launch strategy is education this year, and broader launch next year. That may be very different than the initial launch strategies for those other products. Remember, part of the difference here is it is a drug device combination. Part of it is they want to make sure the education is a very new paradigm, and part of it as I talked about, is there is a 3 to 4-year lead that we have in the marketplace, for this really being a unique product, very different than in other situations. I think Pfizer is taking the long point term view.

Our confidence is as equal or greater as it has been. I think they are taking the right strategy, but it may be a different strategy than some of these other products took at launch.

Any other sort of other reasons why those launches might have been different? Were they detailed differently, or were they, was the, I am just wondering, other than the actual launch strategy itself, any other reasons, Rob, that you can think of?

Those are questions best answered by Pfizer. I think as they said, their focus right now is on education. We don't know if the focus of the other launches may have been different.

Fair enough. Thank you.

Next question comes from Ian Sanderson from Cowen and Co. Please go ahead.

Good afternoon. Thanks for taking the question. First on the Exubera manufacturing revenue guidance in '07, Lou, you mentioned that implied in that guidance is a rough assumption, in terms of reduction in the unit manufacturing costs for '07. Can you just give us ballpark what that sort of range of reduction in the unit manufacturing cost is? Secondly, are you currently making money on the manufacturing of Exubera, and what should we look for in terms of that margin in '07?

And then finally, you spoke briefly on the second generation device. At one point I think you had expressed confidence that you would have a second generation device to the market before any of the competitors came, and I was wondering if you still felt that way?

Let me take a crack at it, Ian. First off, as you know we were ramping up manufacturing throughout 2006, and the manufacturing by its nature has a fairly large fixed cost portion, and a relatively small variable cost portion. As we continue into next year, we will have ramped up, and therefore the unit costs will go down, as the fixed costs are spread over a larger number of units. That is the limit of what I can tell you about the unit costs on this call.

As far as making money, we do make money on the sales. We bill Pfizer the cost plus a mark-up, and that ensures that we make money on it. We don't make a vast amount, but it is a positive contributor, and second generation device, Rob.

Second generation, Ian, we are pleased with the progress, there obviously, the goal has been as we stated before, is to basically be out there to meet and beat the competition, which we think will be an outstanding product, and we think that we are making good progress towards that.

Can I ask a follow-up on the manufacturing, any sort of guidance as to what we should assume for the margin next year, or is that a fixed margin, and you did allude to Pfizer's manufacturing scale-up issues, and those being resolved by the time of the PCP launch. There has been all sorts of speculation out there about exactly what those issues are. Can you provide any clarity on that?

I can take that. I think, Ian, that is really appropriate for Pfizer to comment on, and I think they did discuss it on their conference call recently.

Okay.

Next question comes from Elliot Wilbur from CIBC World Markets. Please go ahead.

Good afternoon. Thank you for taking the questions. Can you just remind us exactly how much visibility you have, in terms of the actual manufacturing orders from Pfizer? I forget, is it 3 months forward, or 6 months forward?

Yes, Elliot. Every quarter they give us a forecast, a rolling forecast for a year, and they give us a purchase order, for not the coming quarter but the quarter beyond that. So we have a purchase order in place for the first quarter of 2007 now. That is the extent of it, we have firm purchase orders for the fourth quarter of this year and the first quarter next year, and we have a best estimate from Pfizer for a rolling year.

I think something that should give people comfort at this point, is when they look at, when you look at the amount of inventory that we have built up this year for Pfizer on devices and powders, couple that with the orders they are giving for next year, which as we said, are high in dollar amounts, and significantly higher in volume amounts, when you look at the numbers, I think obviously we can't give specific numbers, it should give people confidence in what Pfizer is looking at for launch of the program.

Okay. And then I want to ask a question around your expectations of profitability, given an Exubera number somewhere north of a billion dollars. Basically all-in, your take on Exubera is roughly 10 to 20% of sales in that range. Is that correct?

Yes. What we have said is that in a study state, is we are about 10 to 20% of top line revenue from Pfizer goes to us as top line, about 8 to 12% of their top line goes to us as gross profit.

For example, for every billion dollars of sales in a steady state, we would get 100 to $200 million as revenue to Nektar, 80 to $120 million is gross profit, and that gross profit comes from a combination of manufacturing mark-up and royalties.

Okay. If I took a billion, and just took the mid-point of that range, 15%, roughly 150 million, that's basically the same, or fairly close to the amount of Exubera revenue coming in this year via manufacturing, and understand that outyear portion may have a much greater percentage for royalty, but based on the same revenue run rate, you know, you are still estimating a net loss of 75 to 95 million for next year, so it seems that other things have to happen, simply beyond Exubera crossing that threshold to reach profitability. Is that fair?

I think some of the things are obviously, as you point out, next year as we have said, we have been conservative in our royalty estimate, and sort of the mix of royalty and manufacturing will change over time as the product ramps. Secondly, as we said, we are anticipating a partnering our two lead programs some time in the second half of next year.

Third, as Lou pointed out, that some of the focusing efforts we expect to take hold in the second half of next year, and fourth, some of the productivity improvements that we have been focused on, particularly around the Six Sigma program, we think will start bearing fruit. We actually think it is a number of factors that we laid out early in 2006, is our game plan starting to come together to achieve profitability.

All right. Thank you.

[OPERATOR INSTRUCTIONS] The next question comes from Jami Rubin from Morgan Stanley. Please go ahead.

Thank you, Rob. I got a couple questions. First relates to what your and Pfizer's expectations are for the GP marketplace.

It does seem that just implied in your comments, is that you would expect that we should look for a significant ramp after January 2007, and I guess my question there is, I mean I would think that the general practitioners are less educated, if the reason for the slowness and the scripts that we are seeing now, is because of the large amount of education to endocrinologists. Endocrinologists are already well educated in diabetes, whereas the GP community I would imagine is less educated. Should we expect that, just give us a sense for how we should look at the development of prescription trends for next year.

I would imagine that GP's are going to require even more education than the endocrinologists.

The specifics of the ramp for next year, that is really for Pfizer to comment on. That is their responsibility, and I think they will give you much better visibility. Because they know the specifics of their launch plan, and I think to your specific point, I think the education that is going on, obviously isn't on diabetes per se. Endocrinologists as you point out are quite knowledgeable about diabetes.

It is on basically the whole new paradigm for treating diabetes, and this drug device combination to do so. I think what Pfizer has said, what they are focused on is educating people as to how the system works, and educating them on Exubera, and educating them on the paradigm.

If you look more broadly is oftentimes general practitioners in many areas will look to endocrinologists as the experts in the area. I think it is a very wise strategy to focus first on the education of the key opinion leaders locally, because that will pay fruits as you broaden the product to general practitioners.

My other question relates to your assumptions next year for your non-GAAP net loss of 75 to 95 million. Can you just walk us through some of the expense line items that you can give us, and specifically just was curious to know what sort of gross margin you are expecting next year?

Jami, we are just not prepared to do that at in point in time. These are preliminary estimates, and we will give you more information on that when we have our annual results-- [multiple speakers].

Did Rob imply though that the SG&A and R&D spending would be down in '07 relative to '06?

Yes. We haven't given that yet.

Okay. Thanks.

At this time, we have no additional questions. Please go ahead with any closing comments.

Okay. Thank you all for joining us, and Chris, Lou, and I would be delighted to answer further questions, and we are looking forward that on our next call, we will be talking about the broad launch of Exubera.

Thank you for participating in Nektar's third quarter financial results conference call. This concludes the conference for today. You may all disconnect at this time.