Repligen Corp (RGEN) 2006 Q3 法說會逐字稿

Good day, ladies and gentlemen. And welcome to the third quarter 2006 Repligen Corporation earnings conference call. My name is Colby, and I will be your coordinator for today. At this time, all participants are in listen-only mode. We will be facilitating a question-and-answer session towards the end of this conference. [OPERATOR INSTRUCTIONS]

I would now like to turn the presentation over to your host for today's call, Mr. Walter Herlihy, President and CEO. Please proceed, sir.

Thank you and good morning. Joining me today on our call is Dan Muehl, who recently joined us as Vice President of Finance and Administration and Chief Financial Officer. Dan was previously CFO for Physiometrix, a medical device company, which was acquired by Hospira last year. Dan is a seasoned financial executive with broad experience in public company environments and we are pleased to have him join our team.

At the outset, I would like to state that this discussion will contain forward-looking statements which are not guarantees of future performance, such as our projections of future revenues, profits, losses and financial stability, opportunities for collaboration and licensing, our intellectual property portfolio, our plans for clinical trials, and likelihood of successful litigation. These statements are subject to certain factors which may cause Repligen's plans to materially differ or results to materially vary from those expected, including market acceptance of our product, unexpected preclinical and clinical results or delays, the need for additional research and testing, delays in manufacturing by us or our partners, failure to receive adequate supply of product and clinical materials from our partners, timing of product orders, delays or failures of regulatory approvals, access to capital, adverse changes in commercial relationships, and the risk that the results of earlier clinical trials are not necessarily predictive of the safety and efficacy results in larger clinical trials. And a variety of other risks set forth in our filings with the SEC, including but not limited to our annual report on Form 10-K, except in circumstances in which prior disclosure becomes materially misleading in light of subsequent events. We do not intend to update any of these forward-looking statements to reflect events or circumstances as of the date hereof or to reflect the occurrence of unanticipated events.

This morning we released our financial results for the third quarter of our fiscal year 2006, which ended on December 31st. I will first ask Dan to review our results, then I will comment on other developments at the Company. Dan?

Thank you, Walt. For the quarter, we have reported product sales of approximately $3 million, up 31% from the third quarter of the prior year. Our gross margin and product sales was 72%, resulting in gross profits of $2.1 million, an increase of 74% from the prior year. Our cash and investments on December 31st were $23.1 million, essentially unchanged from our cash position at the beginning of our fiscal year.

Based on these results, we expect revenue for fiscal year 2006 ending March 31st, 2006, of approximately $12.5 million, which represents a 34% increase over the prior year and gross profits for the year of approximately $9 million or 64% above the prior year. We are reducing our expectation for net loss for this year from $1 million to breakeven and lowering our expectation of cash burn for the year to less than $1 million, resulting in estimated cash balance of around $23 million on March 31st, 2006.

We expect our capital expenditures for the current year to be approximately $800,000, primarily directed to the expansion of our manufacturing facility, an investment we expect to continue in the coming year. We believe these capital investments will double our production capacity, which should enable us to meet market demands for Protein A for the next several years. Now for an update on the Company, I will turn it back over to Walt.

Thank you, Dan. Continuing on this topic, during the quarter we made the first large scale runs of Protein Z for GE Healthcare. Protein Z is a modified form of Protein A, which GE Healthcare believes may offer its' customers performance advantage over existing Protein A products.

Now let me turn to our intellectual property assets. Our patent infringement lawsuit with MIT against ImClone and their Erbitux product for colon cancer is progressing steadily. Last year, both ImClone and Repligen MIT filed motions for summary judgment on the issue of exhaustion of patent rights. Last Thursday, the court held oral arguments on these motions. When the court rules on these motions, there are three potential outcomes. First, the court may rule in Repligen and MIT's favor, dismissing ImClone's patent exhaustion defense from the case. Second, the court may rule in ImClone's favor, dismissing the case based on patent exhaustion. Or third, the court may deny both motions and permit the matter to move towards trial with ImClone's patent exhaustion defense still in the case. We expect a ruling shortly, although there is no deadline on the court.

Our objective is to seek a settlement or judgment against ImClone which reflects the fair value of our patented technology, which was used by ImClone to manufacture approximately $1 billion of Erbitux. This case is being prosecuted under a partial contingent fee agreement with Fish & Richardson.

We also own intellectual property on the use of CTLA4-Ig for the treatment of rheumatoid arthritis, multiple sclerosis and lupus. In December, the FDA approved Bristol-Meyers' license application for CTLA4-Ig, which they intend to market under the brand name of Orencia. In January, Repligen and the University of Michigan jointly filed suit against Bristol for patent infringement. The case was filed in the eastern district of Texas, which is a jurisdiction characterized by judicial expertise in patent cases and relatively rapid prosecution of cases. Our objective is to license our patent to Bristol in exchange for a royalty, whether through negotiation or litigation.

Turning now to our product pipeline. In October, we announced the initiation of a follow-on study to our previously reported Phase II study in schizophrenia to determine if secretin had the potential to improve certain cognitive deficits in patients with moderate to severe schizophrenia. This trial is enrolling well, and we expect to complete the study in approximately three to four months.

We've also carried out a Phase I clinical study of secretin in a chronic anxiety disorder called Obsessive-Compulsive Disorder. In this trail, eight patients received ten micrograms per kilogram three times a week for four weeks. Patients were evaluated prior to dosing, four times during treatment and a month after the last dose. One patient in this group showed a clinically significant improvement documented with multiple assessment tools throughout the treatment phase, which then washed out when the drug was discontinued. Two other patients showed sporadic improvements during the treatment stage.

Based on these results, we evaluated four additional patients at a 20 microgram per kilogram dose. However, none of these patients showed a consistent or robust clinical response with the primary measurement tools. In the coming weeks, we'll evaluate additional secondary end-points and consult with the investigator on whether to continue enrolling at this higher dose level.

Our second product candidate for neurophysicatric disease is uridine, a naturally occurring nucleoside, which we are developing for the depression associated with Bipolar disorder. During this quarter, we completed our IND submission which was approved by the FDA, and we expect to initiate our Phase II study in several weeks. This study will enroll approximately 80 patients who will receive an oral formulation of uridine or a placebo over a six week period. Patients will be evaluated for improvements in their symptoms of depression using standard assessment tools. As previously announced, this study is partially funded by a clinical research grant from the Stanley Medical Research Institute.

For the past three years, we have been marketing SecreFlo, which is synthetic porcine secretin to gastroenterologists for use with certain GI diagnostic procedures, with annual sales of approximately $2 million. Some of our customers have noted reports in the literature that secretin can also be used to improve MRI images of the pancreas to, for example, identify structural abnormalities or to aid in the diagnosis of acute or chronic pancreatitis. We are aware that several of our customers have been using SecreFlo for this off-label application.

Over the past several years we have conducted numerous clinical trials of our synthetic human secretin product, or RG1068 in a variety of clinical settings. These trials demonstrated that RG1068 is well-tolerated in both children and adults. In addition, we have an efficient commercial scale manufacturing process. It is thus logical for us to seek other applications for RG1068, which can leverage our existing investment in safety data in manufacturing.

Based on the feedback from our customers on the efficacy of secretin and MRI image enhancement, we have initiated discussion with the FDA to establish the criteria for the approval of RG1068 in this indication. Our initial assessment of the market for RG1068 and MRI indicates there are more than 100,000 patients in the U.S. for whom this drug may be appropriate. At the current wholesale price for SecreFlo of approximately $300 per vile, one can infer a potential addressable market opportunity of more than $30 million, assuming reimbursement at the current rate. We are excited about this opportunity and look forward to providing additional information on our plans if we're able to come to an agreement with the FDA on the criteria for marketing approval.

Our corporate strategy is to redeploy the growing profits from our current products and any revenue we may receive from our patents to bill a sustainable franchise in CNS disease. We are currently evaluating several product acquisition candidates. However, the timing of any acquisition or partnership is uncertain. To accelerate this effort, we recently hired Tim Harris as Vice President of Corporate Development. Tim was previously at Peptimmune, a company he helped to form and spin out from Genzyme. Prior to that, Tim spent five years at Genzyme in project management and corporate development. We welcome Tim to our management team.

And finally, due to the eminent expiration of ten year stock option awards, four of our Company's managers plan to exercise incentive stock options totaling 200,000 shares and to sell an aggregate of approximately 150,000 shares of stock in the open market. For example, I will be selling approximately 50,000 shares and acquiring through the exercise of options, 100,000 new shares of our stock. While we are not required to preannounce these sales, we are doing so today to ensure transparency and to communicate the circumstances surrounding these sales. We will focus on improving our business and providing excellent long-term returns to our shareholders, including ourselves.

That concludes our prepared remarks for today. At this time, we would be happy to answer any questions you may have concerning either our Q3 results or any aspect of our business.

[OPERATOR INSTRUCTIONS] Your first question comes from the line of [Ted Davis] with Mesirow Financial. Please proceed.

Good numbers, Walt. Congratulations. Could I just ask if the Protein Z is covered under the same patent as the A?

That's a good question, Ted. No. Protein Z is a separate molecule. So it has its own independent patent coverage. This is a proprietary product of GE Healthcare, which they have transferred the manufacturing to Repligen, as was called for under our agreement of a year ago. We will be manufacturing exclusively for them for at least the next five years.

Thanks.

Your next question comes from the line of [Robert Beck] with [IB College Privileges]. Please proceed.

Yes. Congratulations on the quarter.

Thank you.

Obviously, on both ImClone and especially the Bristol negotiations, we're really interested in the Fish law firm and how they are proceeding on the Bristol-Meyers matter.

Okay. So your specific question is -- how is Fish proceeding on the Bristol matter?

Right. What is their current status?

Well, they're fully engaged in the case and have done an extensive amount of background work, and taken the lead in setting both the strategy and the tactics for the case. It was their judgment that the jurisdiction I mentioned earlier, the eastern district of Texas, was the right place for us to be because the judges there have a good working knowledge of patent law and have seen a lot of patent cases. In addition, the case has moved relatively rapidly through this system in the eastern district, unlike some other districts in the United States. So I would say they're engaged on all levels of both strategy, execution and tactics.

What is the timing of the Bristol marketing of this drug?

Well, our understanding from Bristol's public statements is that they expect to launch Orencia in the RA -- the rheumatoid arthritis market sometime in the next month.

And then finally on ImClone, is that an active project?

Very much so. As I mentioned last Thursday, we were in court in Boston, the lawyers were for both sides, arguing what's called the summary judgment motions, which the last step potentially before a case goes to trial. That case was initiated in May of 2004 and has progressed relatively rapidly. Again, paneled by Fish and Richardson.

ImClone is in active marketing right now?

I'm sorry. Imclone is actively marketing the drug. They launched their drug in February of 2004, and so they have been on the market for approximately two years.

Thank you. Congratulations again.

Thank you.

[OPERATOR INSTRUCTIONS] Your next question comes from the line of [Anthony Joseph]. Please proceed.

I had a question. If the court trial is -- comes in our favor from ImClone and Bristol-Meyers. What effect do you think that will have on your bottom line?

Well, two separate questions. If I understand your question correctly, if we are successful in the litigation -- in gaining some economic value from our two patents -- I can answer it in two ways. In the current configuration, we are, as Dan mentioned, pretty much in a cash neutral position. Clearly, that would be highly leveraged if we were able to secure additional income from either of our two patents. Having said that, we certainly want to also think of reinvesting at least some of those revenues into higher value products in the CNS area. I think for me is the bottom line is that -- under no circumstance, can I envision that we would stray from the current strategy of maintaining financial stability, meaning balancing expenses and revenues. And that puts us in a good position to capitalize on any future revenues of either of those two.

Your next question comes from the line of [Ann Lee] with Rodman & Renshaw. Please proceed.

Hi. I started the conference call a little bit late. Didn't catch too much of your guidance for the whole fiscal year. Would you please let me know the difference between your previous guidance versus the guidance this time?

Sure. I'll ask -- since you didn't meet him on the call, Dan Muehl, our new CFO, to provide you that information.

The guidance we just provided previously was that revenue would come in approximately $12.5 million, which is a 34% increase over last year. And gross profits would be in a range of $9 million or a 64% increase from -- over last year. Additionally, the -- as opposed to a net loss of $1 million, which is previous guidance, we've lowered that to a breakeven year. And we've adjusted our cash burn expectation to less than $1 million for this year, which would put us in the $23 million range at the end of March.

Okay. Thanks.

[OPERATOR INSTRUCTIONS] Your next question is a follow-up from the line of Ted Davis. Please proceed.

Walter, could you give us an explanation, or me anyway, of the difference between Protein A and Z?

Sure. Protein Z is a genetically modified form of Protein A. So it is substantially Protein A, but it has a dozen or so changes in the molecular structure. The data that we've seen from GE and some of their customers indicates that it's a more robust stable molecule, meaning you can use it in a manufacturing process and then clean it with more vigorous solvents -- make it easier for the manufacturing operators to clean up after a run and sterilize the column and get it ready for the next run. It's a convenience for them that is a slight improvement over where they are with Protein A.

Thank you.

Just a commentary, we would expect the penetration of Protein Z into the monoclonal antibody market, as always, to be rather modest in the early going years. As you know, these are very tightly regulated processes and industries. But we're pleased though, to be working on all aspects of this antibody purification area with GE. I would suspect we'd have primarily Protein A for the balance of our sales for the next several years.

Thanks very much, Walter.

Yes.

At this time, there are no further questions in queue.

Okay. Well, thank you all for joining us on the call today. As always, if you have additional questions about the Company, please feel free to direct them to Investor Relations at the Company.

Thank you for your participation in today's conference. This concludes the presentation. [OPERATOR INSTRUCTIONS] Good day.