Cassava Sciences Inc (SAVA) 2005 Q4 法說會逐字稿

Good day, ladies and gentlemen. Welcome to the fourth-quarter and year-end Pain Therapeutics corporate conference call. My name is Raka and I will be your coordinator for today. At this time all participants are in a listen-only mode. We will be conducting a question-and-answer session towards the end of this conference. (OPERATOR INSTRUCTIONS) As a reminder, this conference is being recorded for replay purposes.

I would now like to turn the presentation over to your host for today's call, Ms. Christi Waarich, Senior Manager of Investor Relations. Please proceed, ma'am.

Thank you and thank you for joining us. With us today from management are Remi Barbier, President and CEO, and Pete Roddy, Chief Financial Officer.

Before we begin let me mention that during this conference call except for historical information and discussions contained herein, statements may constitute forward-looking statements for the purposes of the Safe Harbor provision under the Private Securities Litigation Reform Act of 1995. PTI disclaims any intent or obligation to update these forward-looking statements and claims the protection of the Safe Harbor for forward-looking statements contained in the act.

Examples of such statements include but are not limited to any statements relating to the Company's development of its drug candidates, the timing and scope of the Company's clinical development of its drug candidates, the potential benefits of the Company's drug candidates and the Company's net cash requirements in 2006. Such statements are based on management's current expectations but actual results may differ materially due to various factors including but not limited to do those risks and uncertainties relating to difficulties or delays and development, testing, regulatory approval, production and marketing of the Company's drug candidates, unexpected adverse side effects, or inadequate therapeutic efficacy of the Company's drug candidates that could slow or prevent product approval or market acceptance, including the risks that current and past results of clinical trials are not necessarily indicative of future results of clinical trials.

For further information regarding these and other risks related to the Company's business, investors should consult the Company's filings with the SEC.

With that, I would now like to turn the call over to Remi.

Thank you, Christi. This is a financial conference call and shortly we will turn the microphone over to our CFO, Pete Roddy. But before we do so I'd like to offer some insights on Pain Therapeutics, where we have been and where we are going.

A year ago at this time we had a conference call and during this conference call we noted that at that time we had what we called three shots on goal, which is to say three in Phase III clinical development. A year later where are we? A year later we are with the prospects of one drug, Remoxy, which was a huge win for us in 2005; a second drug, Oxytrex, where we had one Phase III that worked very well; and one mistrial with Phase III with Oxytrex. And we also learned that a third program in IBS does not work, at least does not meet the FDA's criteria of approvability, so we passed on that one.

So if 2005 was a year of uncertainty, in contrast we see 2006 as a year of growth and by this I mean that at this point we have two drugs that we know are headed into late stage clinical development and eventually commercialization. We also believe a [tier] of growth given the stability of our financial situation after closing our marketing alliance with King Pharmaceuticals at the end of December 2005.

So Remoxy, what is this drug? Remoxy is really -- it is a highly novel abuse resistant form of long-acting oxycodone. Long-acting oxycodone is also known as OxyContin. Sales of OxyContin are believed to be somewhere between 1 and $2 billion in the United States even after its generic form has arrived. And again, we have a safer, abuse resistant form of this drug.

We have proven safety and efficacy on this drug. We have positive Phase III data on the pain relieving aspects, and we have positive Phase III data on safety aspects. Most of all, we have quite a huge volume of abuse resistant data on Remoxy. The key value of Remoxy is that it resists common methods of abuse, i.e. it does not -- well I should say alcohol does not dissolve Remoxy. This is very, very important. As a matter-of-fact, most recently I want to say a few months ago, the FDA pulled an opioid drug off the market specifically because this drug had the potential to dissolve in alcohol.

So again, Remoxy resists common methods of abuse and we see this criterion as being the key to unlocking a huge amount of value for Pain Therapeutics and King Pharmaceuticals.

Now last week was the big conference in San Francisco, the H&Q Biotech Conference, and I went there. Although we did not present I went there and met up with a number of colleagues and invariably people congratulated Pain Therapeutics on the King deal. I want to be on record as saying the King deal is a win-win situation. The sheer magnitude of the deal does not reflect a huge negotiation win on our part; rather the sheer economics of the deal really reflects the potential of the drug itself. If anyone sits down and does a net present value on a safer form of a 1 to $2 billion drug, I believe you will come up with the type of numbers that we came up during our negotiation with King Pharma. So again, the message we have is that the King deal is a win-win deal and, yes, huge economics but the economics simply reflect what both parties believe to be the value of the drug.

I should also point out that the value of the drug is backed up by quite a bit of in-depth market analysis. Our market analysis and third-party market analysis I should add really describes two things -- three things. It describes that physicians do favor abuse resistance in clinical practice; that physicians are willing to try and prescribe Remoxy as compared to all other opioids out there. And third, our in-depth market analysis shows that Remoxy does have potential to be a premium priced drug. These are three very important criteria when negotiating a deal, and certainly both parties recognized it and struck a deal accordingly. That is Remoxy.

On the Oxytrex front, what we have here is we believe we have a painkiller with minimal physical dependence. As I think most people know, opioid use can be habit forming. What this means is that if you take a sufficient amount of opioids for a sufficiently long amount of time, it could be difficult to get off the opioids. This is known as physical dependence. We believe Oxytrex has minimal physical dependence. This belief is backed up by two sets of Phase III clinical data. We are entirely and firmly behind this drug candidate.

I should also point out that Oxytrex and its commercialization is controlled by Pain Therapeutics and is not part of our alliance with King Pharmaceuticals.

We do expect to meet with the FDA in March of this year to present the FDA with our thoughts on how to design a trial that specifically addresses the dropout issues associated with opioid studies. And as soon as we get feedback, specific feedback from the FDA, we will share it with our audience and our investors.

I should also point out that our goal is to file one new IND per year and this year we believe the IND will focus around an abuse resistant opioid drug. We have not disclosed specifically which opioid drug, but it will be an opioid drug that we believe solves a significant problem. And I should also point out that the IND will be part of our deal with King Pharmaceuticals.

As I think everyone knows, King signed up for three opioid painkillers -- and this is -- I'm sorry, four opioid painkillers, and this is one of the four.

We do expect to file the IND in the second half of '06. So again to the extent that 2005 was a year of uncertainty, I think we went through the process of opening up the envelope on three Phase III drug candidates, on Remoxy, a clear win; on Oxytrex, we feel a win; the third drug did not pan out. We're moving on, and so 2006 for us is really a year of growth, growth of the pipeline and growth of our financial situation.

There are three specific points that I would like to make. One is that we have a very strong balance sheet at this point, including a very low cash need. I believe our cash per share is somewhere just under $5.00 per share. Second point is that we have a late stage pipeline that addresses the concerns around drug safety and we have a new type of clinical design called a titration design that specifically addresses the dropout issue that we and others have seen. The third point I'd like to make is that we have a $400 million deal in place that in our opinion provides us with a clear pathway to commercialization for Remoxy.

With this, I would like to turn the mike over to our CFO, Pete Roddy.

Thank you, Remy. My comments will start with a review of the financial results for the fourth quarter and the full year 2005. I will touch on the cash and balance sheet information first, then review income statement results. After that I will provide some information about our expectations for finances in 2006.

We ended the year with 213 million in cash and investments. This extraordinary balance includes receipt in late 2005 of the $150 million upfront payment from King. I would like to remind you of some of the financial highlights of the King alliance from our prior announcement to provide some background for some of these results. In addition to the $150 million upfront fee, we could see $150 million additional in clinical and regulatory milestones under the agreement. In addition, King will reimburse our expenses incurred in support of the alliance, which could total 100 million over the course of time. These three factors reflect a $400 million total before royalties.

We had provided guidance prior to the announcement of the King alliance that we would end 2005 with about 60 million; subtracting the 150 million leaves us 63. We met and exceeded our cash management goals for 2005 even before we add the proceeds from the King alliance.

You may notice a new line on our current assets for collaboration revenue receivable. I mentioned that King will reimburse our expenses incurred in support of the alliance. These reimbursements happen quarterly, so we will show a receivable on our balance sheet for the expenses incurred in one quarter that are reimbursed the following quarter. So we have 213 million to start 2006 to allow us to focus on our late stage pipeline addressing drug safety.

When you look at the other side of our balance sheet, you'll notice two other new line items, deferred program fee revenue current portion and deferred program fee revenue noncurrent portion. I want to emphasize that this deferred revenue is not debt. These balances relate to the 150 million upfront payment that King paid to us in December. Generally accepted accounting principles call for such payments to be recognized in connection with future activities under the alliance. So we recognized 3.7 million in program fee revenue from the date of the announcement of the alliance with King until the end of 2005.

The current portion of the deferred revenue is what we expect to recognize in 2006. The remaining portion of the deferred revenue will be recognized over time. Again, there is no debt in the balance sheet. This balance sheet is very strong, reflecting as Remy said, just under $5.00 per share in cash.

Now I will turn to the P&L. We saw a net loss of 3.1 million for the quarter and 30.7 million for the full year 2005. It's very nice to talk about revenue for the first time today. We have two new types of revenue in these results. First you see the 3.7 million of the non-cash amortization of the 150 million program fee. Second, we have 1.4 million of collaboration revenue for the reimbursement of expenses we incurred during the period starting at the announcement of the King alliance in November to the end of the year.

Our research and development spending is shown before these reimbursements. R&D was lower in the fourth quarter of 2005 as compared to the fourth quarter of 2004, as well as for the full year 2005 compared to 2004. This stems primarily from the timing of clinical trials activities and related expenses.

As Remy mentioned, we had a number of Phase III trials over the course of the year.

Our G&A expenses were higher in Q4 2005 as compared to Q4 2004, as well as for all of 2005 compared to full-year 2004. In particular, we had one time expenses in the fourth quarter of 2005 in connection with executing the strategic alliance with King. Otherwise our general corporate expenses were slightly higher in 2005 as compared to 2004 for our ongoing general and administrative activities.

Interest income is not particularly exciting except to note that we expect our total returns on investments to be much higher in 2006, given our strong cash position at the end of 2005. That provides a transition to talk about our expectations for 2006.

We are going to keep our focus on guidance on cash in 2006. We see overall cash flow for 2006 to be a net cash usage of about $15 million plus or minus 10%. All of our future research and development expenses for Remoxy and other abuse deterrent product candidates under the King alliance will be reimbursed by King. We expect the amount we spend on R&D under the King allowance to grow significantly in the future, but this increase will not affect our bottom line because these expenses are reimbursed by King.

In 2006, our efforts outside the abuse deterrent franchise will focus primarily on Oxytrex. As Remy mentioned, we expect to start another Phase III trial this year. Given the nature of our operations, you should expect the gross research and development spending to fluctuate over the quarters in 2006, given the timing of our clinical and other third-party R&D activities.

Our general and administrative activities will not increase significantly this year. We believe we will spend in total about 23 million on our R&D and G&A activities, offset by interest income on our portfolio of investments of about 8 million. That brings us to an estimated cash flow for the year of about 15 million plus or minus 10%.

While our guidance focuses on cash, we see three significant non-cash items in 2006 that will flow through our income statement. First in revenue, the amortization of the program fee of about 26 million that I've already discussed; and second, in our operating expenses non-cash expenses related to stock options under a statement of financial accounting standards 123R; and lastly, taxes below the line. These are non-cash items in '06 and not included in the guidance of $15 million.

I have covered the amortization of the program fee in my prior comments. We expect the non-cash revenue to be about 26 million. Regarding stock options starting in the first quarter of '06, we are compelled by GAAP to include in our financial statements an estimate of non-cash value related to options granted to employees. I imagine everyone has heard much about this topic, so I will avoid diving into too many of the arcane details. Suffice to say that our research and development and general and administrative non-cash expenses will increase in 2006 by virtue of our estimates of these non-cash values for options calculated using an option valuation tool called Black Scholes under assumptions that are described in our notes to the financial statements.

We expect analysts and others reading our financial results will find it straightforward to separate out these non-cash expenses from our other cash based operating results.

Lastly the inevitable, taxes. This is a fairly unusual topic for an earnings call for a biopharmaceutical company. The 150 million program fee from King not only provides incredible strength to our balance sheet, but puts us in the enviable position of realizing the benefit of some of our tax carryforwards from prior years. We believe our carryforwards and credits will not be limited materially. With that said and given the tax laws, we will provide an estimate of alternative minimum taxes for 2006 given our possible results for tax purposes for 2006. We expect the cash flow for those alternative minimum taxes to be in 2007.

So to sum up, we've got an incredibly strong cash position of 213 million now with modest cash usage of 15 million in 2006. That is about $5.00 per share, just under $5.00 per share in cash and we have no debt. We have the financial strength to develop our late stage pipeline addressing drug safety and we have the new and exciting strategic alliance with King Pharmaceuticals that serves as a pathway to commercialization. Christi?

Operator, we will now take questions in the time that we have left.

(OPERATOR INSTRUCTIONS) George Fulop, Needham & Co.

Thank you for taking my question. First for Remi, a question on what is the product profile of a candidate you might move into the clinic under the IND in abuse resistant product candidate? Second for Pete, can you go over a little more on the second part of your accounting treatment regarding the non-current portion -- over what time period should we be thinking about for the out years?

Pete and I will take it as a 1-2 1Q type question. I think my portion of it is was what is the product profile of the new IND? Gosh, it's going to be hard to answer without spilling the beans, but I can tell you that it is an opioid drug. It is an opioid drug that has been associated with potential abuse issues, especially in alcohol. It is a drug that we feel if it were on the market today and could address the issue of alcohol abuse, we feel this could sell in the hundreds of millions of dollars. Again I don't mean to be mysterious, but I really can't answer any more without just simply disclosing the full name.

But the program it is on track and again we do expect to file this IND middle of the year, probably more likely like the second half of 2006 and it will follow very much the example of Remoxy, which is entirely on track. And we do expect to commence a Phase III program, a pivotal Phase III I should add, with Remoxy in the current quarter, if not the current month. Pete?

Thank you. George, to repeat the question, I think you were asking for a little more color on the amortization of the non-current portion of deferred program fee revenue?

That's right.

Perhaps this will give you enough. We'd see a like amount in 2007 as 2006 and just roll it out until its exhausted. Does that help?

Okay. Can you also (indiscernible) go into what you think the Oxytrex Phase III trials cost ballpark might be going forward, given past experience with Oxytrex trials?

I'm sorry, George. You're fading. Can you repeat?

Can you also please go into your estimate of what you think the Oxytrex Phase III trial costs might be, given your experience with previous Phase III Oxytrex trials?

Okay, the question as I understand it is what are the estimated costs of the Oxytrex program in 2006? I believe Pete has not broken out programs specifically, but you can imagine that if we conduct a Phase III pivotal trial in the same way that we have conducted our previous trials, i.e. 400, 500, 600 patients, you can expect this type of trial to cost maybe 5 to $10 million all in. Would you agree with that?

Yes. I think that's a reasonable estimate and then the cost of those will flow between '06 and into the beginning of '07.

Thank you very much.

Kassum Tariq, CIBC.

This is Tariq Kassum. Hello. A question on -- just wanted to know if in the past few months as you've followed up on the Phase III results from the Oxytrex study, if you have had any more color or insight into the dropout rate? At the time of data release in November, you talked about a younger group of patients and that the dose titration may have been too fast. Have you been able to come up with any more definitive conclusions since then?

Yes, I have got to say our early conclusions are the same as our later conclusions. There was a very high dropout rate, a dropout rate of approximately 54% overall in this study. And as you know when you lose 54% of your trial, you may as well have stayed home and not done the trial. Having said that, despite seeing a 54% dropout rate, we did see the expected amount of reduction in physical dependency. We were expecting to see -- we were hoping to see a 25% reduction in physical dependency and instead we saw a 28% reduction in physical dependency overall.

Then if you look specifically at the elderly patients, those 50 years and older of age, we saw a 75% reduction in physical dependency with a key value of 0.04. So in our opinion, the drug worked. The study failed. Why did it fail? It failed for the same reasons we spoke about before. We believe that there were some patients who were inappropriately enrolled, but more importantly there were a lot of patients who are simply intolerant to opioids. This has been a haunting problem for the entire industry and by this I mean any company that develops opioid drugs.

So the next question I believe becomes what are we doing to address the dropout issue? We have been negotiating with the FDA to design what is called a clinical study under this thing called a titration design and under titration design, we will essentially eliminate certain patients that we know to be opioid intolerant and yet still preserve the randomization and the statistical integrity of the study itself. Fairly complex. In fact it is a very complex type of design. It is a very novel, very nonobvious study design. And this is why we would prefer to do this type of study under the guidance of a special protocol assessment with the FDA.

We have been negotiating with the FDA for this SPA and there are no disagreements at this point. We're simply waiting for paperwork from the FDA and as soon as we get the paperwork, our Phase III trials will commence.

Okay, great. Thank you. Are there any precedents for this kind or trial design that we can look at?

Hard for me to say what others are doing. I am under the impression that our colleagues at Endo Pharmaceuticals may have conducted a titration design of some sort and may have a simplified titration design. I can't confirm. I think you have a relationship with Endo. Perhaps you can call them. But the important thing is that at this point we want to get the FDA 100% on board not just verbally but also in writing and the method by which we are getting them on board is a special protocol assessment.

Okay, thanks.

James Molloy, Oppenheimer.

My question is on the less abusable forms of opioids, can you talk a little bit about your strategy for either getting the less abusable onto the label or into peer review journals so that it can be more easily marketed?

Yes, there are a couple ways to answer the question of how do you communicate, how do you educate both patients and abusers and physicians on the anti-abuse properties of Remoxy? Well, first off, the easiest segments to talk about are the abusers themselves. No one taught abusers how to abuse OxyContin. Likewise no one is going to have to teach them how to not abuse Remoxy. It will come from empirical evidence. When it comes to drug abusers, these people are very, very clever about all manners of ways of abusing drugs. When they find out that Remoxy -- you just can't get high from it, I assure you that the abusers will move on.

Having said that, what is the more formal means of communicating the anti-abuse properties? Well, if you look at a label approval for a drug, it always contains pharmacokinetic data and our label we expect to also contain pharmacokinetic data. And we will show what happens in pharmacokinetics models under conditions of abuse and conditions of non abuse and physicians and managed care will be able to read the label and figure it out for themselves.

I know we're waiting on the SPA for Remoxy. Is there a time beyond which we will know if we haven't heard you've got -- we will know that you haven't gotten it?

The legality of it is that the FDA can take up to 45 days to respond and we don't think they will take the full, the entire 45 days. We expect a response momentarily, certainly within weeks if not days. As soon as we hear we will put out the appropriate press announcements announcing the commencement of our Phase III trial. But again, the important thing is that at this point all terms and conditions have been negotiated. The SPA will spell out not just the titration design, the design of the pivotal Remoxy, but also we will spell out the fact that we only need one pivotal trial to file an NDA and if successful, the NDA will meet with approvability.

Thank you very much.

Andy Schopick, Nutmeg Securities.

A couple of questions if I may; first for you, Remi. Can you just revisit the historical relationship with Durect and whether there are any ongoing potential financial payments in connection with any existing agreements you have with Durect?

I'm not sure I understand the question. Revisit our relationship with Durect? There is really nothing to revisit insofar as the agreement between Durect and Pain Therapeutics was established -- when was it --December 2002 and the history of Remoxy is actually fairly simple. We in-licensed the technology for approximately $0.5 million over a period of two years. We put $10 million into it, and here we are at two or three years later and we sold for $400 million and a 20% share of the upside. So I think by anyone's criteria that really spelled success for Pain Therapeutics and our shareholders.

Absolutely. I'm just wondering again whether there is anything in connection with that prior agreement going forward that there's any future involvement or potential payments that could be associated with any development efforts?

Yes, there are ongoing regulatory milestones and expenses that will incur in connection with this -- this is Pete talking -- in connection with the Durect agreement. Those expenses -- we are responsible for those and King will reimburse us for those under our alliance with them.

Fine, they are reimbursable.

Yes, but to be clear we do not owe Durect any more or any less economics or money because of the King deal.

That's the question.

Okay, so the King deal is strictly between Pain Therapeutics and King Pharmaceuticals, and it is a commercialization deal and whatever our agreement is with Durect, it stays that way. I should also point out that King Pharmaceuticals -- let's back up. Durect is entitled to a royalty, a modest royalty, but if the sales are sufficiently high, it will be very profitable for them. And I should point out that King is responsible for paying the Durect royalty. So the overall royalty in this agreement is not just 20%, in fact it is our 20% plus whatever is owed Durect for their excipients.

Okay, and for Pete I have several clarifications, if you will. First of all the question was asked with respect to deferred program fee revenue noncurrent over what timeframe? And based on the response that I heard and looking at these numbers, it looks to me like you would be amortizing the revenue associated with the sale over about 4.5 years.

Yes.

Is that correct?

I think the total -- yes.

Okay. So this is going to be fairly linear in terms of the amortization will be at a steady about 6.5 million per quarter?

Yes.

Okay. The interest income that you indicated as your projection on the cash that that you will have of 8 million seems to imply about a 4.5 to 5% return. Can you just give us some kind of guidance on how you will be investing the proceeds, whether it will be primarily in short-/intermediate-term treasuries or what vehicles you will use here?

Sure. We take our cash in excess of our current operating requirements and we invest them as you mentioned in treasuries, in government agencies, and corporate securities that are appropriate for a Company like ours. It is a pretty typical conservative structure that emphasizes safety first, then liquidity, and then return.

I assume you'll keep the maturities relatively short?

Yes, and in this current rate environment especially.

And how many option shares are outstanding? Can you put any number on this 123R stock options related expense in 2006?

Pete, why don't you get back to --? If that's okay, can Pete get back to you? That is a fairly detailed question.

Okay, thank you.

At this time, you have no further questions.

I would also like to mention that as in 2005 we do not expect to have quarterly financial conference calls. Thanks for joining us today.

Ladies and gentlemen, thank you for your participation in today's conference. This concludes the presentation. You may now disconnect. Have a great day.