Repligen Corp (RGEN) 2006 Q4 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the fiscal year 2006 Repligen Corporation earnings conference call hosted by Dan Muehl and Walter Herlihy. My name is Latasha and I will be your coordinator for today. At this time, all participants are in listen-only mode. We will conduct a question-and-answer session towards the end of this conference. (OPERATOR INSTRUCTIONS). I would now like to turn the call over to Mr. Dan Muehl, Chief Financial Officer. Please proceed, sir.

Thank you and good morning. Joining me on today on our call is Walter Herlihy, our CEO. 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 the likelihood of success of litigation.

These statements are subject certain factors which may cause Repligen's plans to materially differ or results to materially vary from those expected, including -- market acceptance of our products, unexpected preclinical or 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 and/or failure of regulatory approvals, access to capital, adverse changes in commercial relationships, the risks that results of earlier clinical trials are not necessarily predictive of the safety and efficacy of results in larger clinical trials, and a variety of other risks set forth in our filings with the Securities and Exchange Commission including but not limited to our annual report on Form 10-K.

Except in circumstances in which prior disclosures become materially misleading in light of subsequent events, we do not intend to update any of these forward-looking statements to reflect events or circumstances after the date hereof or to reflect the occurrence of unanticipated events.

This morning we released our financial results for fiscal year 2006, which ended on March 31, 2006. For the year, we recorded total revenue of $12.9 million including product sales of $12.5 million, up 34% from the prior year and our best year to date; higher sales and an increase in gross margins from 58% to 72%; increased our gross profits from product sales for the year to $9 million, up 64% from the prior year. Our operating loss for the year was $1.2 million. Factoring in interest income of $750,000 and non-recurring income of $1.2 million related in the net profit -- resulted in a net profit for the year $700,000. Our cash and investments on March 31st were $23.4 million or $100,000 less than prior year.

Today we are also providing financial guidance for fiscal year 2007, which began on April 1st. For the year we expect revenues, including Protein A, SecreFlo, and R&D revenues, to be between $13.5 million and $14.5 million and our net loss to be between 2 and $3 million. Excluding a non-cash charge of approximately $800,000 for the expensing of stock options under FASB statement 123(R) which we will adopt as of April 1, 2006. This will result in a GAAP net loss of between 2.8 and $3.8 million.

We expect our cash burn for fiscal year 2007 to be approximately $3 million, which includes $1.4 million of capital expenses primarily to expand our Protein A manufacturing facility. Cash at March 31, 2007 is projected to be between 20 and $21 million. We have projected a modest increase in product sales to range from 12.5 to $13.5 million. This is due to a lack of clarity in the second half forecast from a large customer who accounted for approximately 25% of our fiscal year 2006 sales.

As was the case last year, we are forecasting conservatively and intend to update our forecast each quarter as market demand estimates become more reliable. Those of you who follow the Company are aware that while there are significant quarter-to-quarter variations in demand for Protein A, over the past five years our business has followed the overall demand for monoclonal antibodies, a trend we expect to continue. Now for an update on the Company, I will turn it over to Walt.

Thank you, Dan. In addition to the ongoing sales efforts, we are pursuing three additional activities this year to strengthen our Protein A business, the benefits of which will potentially be realized in 2007. First, this quarter we made the first commercial launch of a new product for GE Healthcare called Protein Z. Protein Z is a modified form of Protein A which GE Healthcare believes may offer its customers’ performance advantages over existing Protein A products. Significant sales are not expected until 2007.

Second, we have completed approximately 90% of our facility expansion, which includes another large purification suite and a new fermentation suite. We expect this facility to be fully operational in the third quarter and we expect it to improve our manufacturing efficiencies in 2007 and beyond.

And third, we have a significant initiative to gain business from Millipore, the only significant consumer of Protein A who is not currently a customer. We believe these and other initiatives will allow us to fully participate in the growth of the monoclonal market for years to come.

Now let me turn to our intellectual property assets, our patent infringement lawsuit with MIT against ImClone and the Erbitux product for cancer has progressed to the stage of summary judgment. Erbitux is manufactured with a cell line which contains our patented technology. Late last year both ImClone and Repligen/MIT filed cost motions for summary judgment on the issue of exhaustion of patent rights. ImClone's motion asserts that the transfer of Erbitux cell line to the National Cancer Institute and subsequently to ImClone exhausted our patent rights. We believe that the transfer of the cell line to NCI was for research purposes only and thus did not exhaust our patent rights.

In February, the court for oral argument on these motions. When the court rules on these motions, the three potential outcomes are -- one, rule in Repligen and MIT's favor, dismissing ImClone's patent exhaustion defense from the case; or two, rule in ImClone's favor dismissing the case based on patent exhaustion; or three, deny both motions and permit the matter to move towards trial with ImClone's patent exhaustion defense still in the case. We hope for a ruling shortly, although there is no deadline on the court. Our objective is to seek a settlement or a judgment against ImClone which reflects the fair value of our patented technology, which was used by ImClone to manufacture approximately $1 billion worth of Erbitux.

We also own intellectual property on the use of CTLA4-Ig for the treatment of rheumatoid arthritis, multiple sclerosis, and lupus. In the first quarter of this year, Bristol-Myers launched its CTLA4-Ig product 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.

Bristol has filed a motion seeking to move the case out of the Eastern district of Texas and we have responded by strongly opposing Bristol's request to transfer. We are currently awaiting a date for a scheduling conference. 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, last October we announced the initiation of a follow-on study to our previously reported Phase II study of secretin in schizophrenia to determine if the preliminary observation that secretin had the potential to improve certain cognitive deficits in patients with schizophrenia was reproducible. The prior observations were made with a condition response learning test referred to as the eye blink test.

Although our current study is still blinded with respect to which group received secretin versus a placebo, I can report that the eye blink test of learning was not significantly different between the secretin and placebo groups two hours after secretin treatment, but was statistically different 24 hours after treatment. This is a different result from the initial observation of an effect within hours of treatment.

Other measurements have been collected and will not be fully analyzed until after the unblinding. However, these measures are unlikely to result in conflicting data on the onset of action observed with the eye blink test. We will provide additional information on our August conference call.

We are also evaluating secretin is an agent to improve MRI images of the structure of the pancreas to, for example, identify structural abnormalities to aid in diagnosis of pancreatitis. Today we announced the initiation of a clinical study to evaluate the use of secretin to aid in the detection of structural abnormalities of the pancreas, which is based on observations made with off label use of our SecreFlo product.

Prior discussions with the FDA have resulted in the consensus on the design of a clinical study to support this indication, including patient selection, study operations, and multiple end points. Discussions are continuing on the statistical analysis plan. The study is currently being initiated in approximately 8 to 10 sites and we expect that data collection will be completed by year's end.

We are also in the final stages of initiating several pilot studies to evaluate the use of secretin to assess the function of the pancreas with a noninvasive MRI procedure. These studies are based on the clinical observation that patients with, for example, chronic pancreatitis, have a reduced ability to produce pancreatic fluid in response to secretin stimulation. Our study is designed to confirm and quantify this observation.

Finally we are evaluating several additional pilot studies to explore the use of secretin in combination with other imaging techniques such as CT or ultrasound, which could further expand the market. We believe that there are more than 100,000 structural assessments to the pancreas carried out by MRI each year in the United States and that the market opportunity for functional assessment is at least as large. Since this application of secretin is not within our core focus of CNS disorders, we intend to begin identifying potential marketing partners with a strong commercial presence in the radiology market while our studies are in progress.

Our second product candidate is oral formulation of your uridine, a naturally occurring nucleoside which we are developing for the depression associated with bipolar disorder. During the quarter, we initiated our Phase II proof of concept study. This study will enroll approximately 80 patients at 7 to 10 sites who will receive an oral formulation of uridine or a placebo for a six-week period. Patients will be evaluated for improvements in their symptoms of depression using standard assessment tools as well as for the induction of mania, a known side effect of existing antidepressants. As previously announced, this study is partially funded by a clinical research grant from the Stanley Medical Research Institute.

We are also evaluating uridine and animal studies of epilepsy. Preliminary studies in rats have provided evidence of neuroprotective and anti-epileptic activity which has led us to initiate experiments in which we will compare the activity of uridine to a standard anti-epileptic drug in more advanced models.

Our corporate strategy is to redeploy the profit from our current products and any revenue we may receive from our patents to build a sustainable franchise in CNS disease. Over the last year we have evaluated dozens of product candidates and are currently carrying out diligence on two focused opportunities. We hope to be able to report progress on this front soon.

That concludes our prepared remarks for today and at this time we would be happy to answer any questions concerning either our fiscal year 2006 results or our business.

(OPERATOR INSTRUCTIONS). [Ram Shalahari], Rodman & Renshaw.

I just had a couple of queries regarding the progress on the secretin study. When do you expect to unblind the data again?

the data for that secretin in schizophrenia study as you're referring to will probably be unblinded in the next 30 days or so after we clean up all loose ends and complete all the data cleaning.

And what you are saying is that in the eye blink test you didn't see a significant difference between placebo and secretin groups?

Well, what we observed was that after administration of secretin we tested the patient's ability to do a cognitive learning test at both two hours and 24 hours after administration of the drug. So what I referred to was a lack of difference between the two groups at the two-hour time point as opposed to a statistically significant difference between the groups at the 24 hour time point.

Okay. And you would expect that the rest of the data once you complete the analysis would be in line with this effect?

No, I think that the rest of the data may be difficult to apply to this particular task other than other domains of cognition. The point that I was referring to in prepared remarks is that the first observations were taken more at the two-hour time point, so this is a little bit of a contradiction in when the activity onset was observed between the two -- the few anecdotal results from prior work with just a couple of patients and this experiment was about 28 patients.

Okay. And if I could just ask a couple questions regarding your projection or guidance for 2007 in terms of revenue and expense. If you could perhaps talk a little bit about what you expect to be the revenue that you would derive over the course of 2007 in terms of the Protein A and SecreFlo franchise?

The guidance that we gave for total revenue was between 13.5 and 14.5 and of that the product revenue portion would be between 12.5 to 13.5. And out of that it would be approximately, for the product portion, I'd say 10.5 for Protein A and $2 million for SecreFlo and that would be at the lower end of the range.

Okay. And the agreements with Millipore, could you clarify what you said earlier during the prepared remarks on the status of that?

What we said is we have a number of significant business development objectives to gain business from Millipore, as they are the only large consumer of Protein A in the world who's not sourcing their Protein A from Repligen. But clearly our objective is to (indiscernible) with the customer as that would be a significant catalyst to our business.

I see.

So I really am not at liberty to know all the details back and forth, but suffice it to say we've been working diligently at that.

Okay.

Hopefully we'll report progress soon.

Okay. And just if you could restate for me what you expect your ending cash position to be and your projected cash burn.

We expect our ending cash to be between 20 and $21 million at the end of next year, which would give us a cash burn of approximately $3 million.

Okay, thank you very much.

[Juan Chaz], private investor.

Did you say anything about the potential size of the market for MRCP or for diagnostic secretin?

I think that our view is that there are two potential applications of this molecule. One is to look at the structure of pancreatic ducts and we believe that in the U.S. alone there are more than 100,000 patients who could potentially benefit from image enhancement with secretin. On the other hand there is another way we could potentially use this molecule to improve functional testing of the pancreas, the ability to test the ability -- or pancreatic reserve if you will, which is often diminished in patients with pancreatitis. And that's probably at least as largest as the structural side of the market. So we think it's a not inconsequential opportunity.

What kind of dollars would be involved?

It's hard to know, Juan, when you're thinking forward about what different issues will come up in terms of reimbursement, for example. But currently the SecreFlo product we sell, which as you know is a synthetic form of secretin, is reimbursed at about $300 per vial. That's per procedure, per patient.

Is that likely to extend to this area, or do you not have an idea?

I think it's a little premature to say, but that's the one solid data point we have about pricing here.

Do you have any sense of the ability to penetrate this market, what the potential is?

If our studies are successful, I think we have a reasonable chance. We already, as you know, have customers using this product off label in these applications, so clearly they've made adjustment about the value of the product to their practice. And we think that our clinical trial will involve many of the thought leaders -- or does involve many of the thought leaders in this particular subspecialty. So those are both I think good foundation points for being successful in this market. And I added a third element to the equation today in discussing our plans for seeking a marketing partner who could have a very large footprint in this market already.

You're pursuing that?

Yes, we're going to begin that presently.

One more question. Is there an international opportunity here as well?

There is. We're at an earlier stage in assessing that, though. We'll come back to that and discuss it some time in the future.

So you would be likely to pursue that with the same kind of marketing partner?

Absolutely. The marketing partners that one might consider are international, and so --.

So the total size of this market or the available size of this market domestically is $60 million in total, maybe 300 times 200,000 procedures?

That's one way to look at it.

Do you have any idea of what you could penetrate there?

We really don't. It's a little bit too early as we haven't really done a formal market research. As I say, it's been mostly done by customers picking up the drug and using it on their own for this indication. Despite the fact that they don't get reimbursed for it or it's difficult to get reimbursement, it's not approved by the FDA for this.

I'm sorry, last question. Do you have any interest from anybody or are you just starting?

No, we're just starting. We thought the most important thing was to get consensus with the FDA because that's what partners want to -- potential partners want to know as well when you sit down and have the first discussion.

Okay, thank you.

[Ini Li], Rodman & Renshaw.

I just wonder what your shares outstanding as of the end of March 31st.

It's approximately 30,300,000.

Okay. And what's your R&D projection for '07?

R&D expense?

Yes.

Approximately $7 million.

Okay. Could you also give me a breakdown of your first quarter of '06 total Protein A and secretin revenue?

Are you asking about the fourth quarter of last year?

No. The first quarter of '06.

Which is our fourth quarter.

You're fiscal quarter or forth quarter, yes.

Generally the SecreFlo sales are about $0.5 million a quarter and the rest is Protein A.

Thank you.

It would be just under $2.4 million in Protein A sales in the fourth quarter.

[Doug Fuegle].

I want to direct this to Mr. Herlihy. I wanted to explore if you could expand a little bit more on your intellectual property lawsuits. First of all, with regards to the ImClone intellectual property lawsuit, as I understand there was a hearing in early May, I think May 4th, with regards to some findings on the discovery phase. Could you expand on that and do you know where you're at with regards to a follow-up evidentiary hearing?

There was a hearing based on a motion for a sanction that you're referring to and that part of the process has been completed and, as with summary judgment, we are simply waiting for the judge to get back to us on how he would like to proceed with that. We don't have a real new guidance on that, but certainly it's possible he could ask for an evidentiary hearing. It's possible he could have another oral hearing with lawyers only. Or it's possible he could make a ruling.

And then with regards to the CTLA4 suit, Bristol is attempting to move venue. If there any particular tactical reason behind that, i.e. with regards to previous outcomes in the Eastern district? Why did your attorneys file in that area?

I think the reason that our attorneys filed in the Eastern district were twofold. One is that the judges there, in particular our judge, Judge Ward, has a vast amount of experience in patent litigation cases. He knows the ropes and that facilitates actually prosecution of your case. And the second is that in the particular district, in Judge Ward's district, cases move through the system a little more rapidly than for example here in Boston where the ImClone case is being prosecuted. So we thought both of those were important since we would like to get to a resolution of this as expeditiously as possible.

Okay, thank you.

(OPERATOR INSTRUCTIONS). Ram Shalahari, Rodman & Renshaw.

I just wanted to clarify one comment that you made regarding the potential market size for the use of secretin as a pancreatic imaging agent. So you said that this is similar -- or I think you said at least as large as the market currently existing for MRI-based imaging. How large is that?

I'm not sure I quite followed your question, so let me just try to address it in a broad sense. We think that today there are more than 100,000 MRIs taken to look at the structure of the pancreas in the United States. We think that there is a potential -- an even larger potential if one could not only take a picture of the pancreas but assess its function. Oftentimes this is something or in some cases in fact a given patient may be assessed for functional pancreatic output more than a single time or as an imaging procedure is usually only done once per patient in a given workup.

Okay, so you said over 100,000 MRI images are taken of the pancreas each year in the U.S.?

Today, at the current state of the market. At the moment there is no good way in the market, there's no procedure that can be used to quantify pancreatic reserve or pancreatic function. And in, for example, alcoholic pancreatitis, patients experience a slow decline of pancreatic function, which it would be useful to be able to attack earlier rather than later because when it gets to later and it becomes clinically obvious, it's much more difficult to provide clinical support.

Right. Thank you.

I show no further questions in the queue at this time. I would now like to turn the call over to Mr. Walter Herlihy for closing remarks.

Okay, I want to thank everyone for participating in our call today. And as always, if you have additional questions please feel free to direct them to the Company at Investor Relations. Thank you.

Thank you for your participation in today's conference. You may now disconnect. Good day.