Cassava Sciences Inc (SAVA) 2006 Q1 法說會逐字稿

Good day, ladies and gentlemen. Welcome to the first quarter 2006 Pain Therapeutics earnings conference call. My name is Angela 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.

Now I would like to turn the presentation over to your initial host for today's call, Ms. Carney Duntsch, Investor Relations. Please proceed.

Thank you Angela and thank you all 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. Pain Therapeutics 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, scope, or expected outcome of the Company's clinical development of its drug candidates; the potential benefits of the Company's drug candidates; the Company's expected cash requirements and provision for taxes in 2006; and the size of the potential market for the Company's products. Such statements are based on management's current expectations but actual results may differ materially due to various factors including, but not limited to, those risks and uncertainties relating to difficulties or delays in 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 Pete.

Thank you Carney. My comments will start with a review of the financial results for the first quarter of 2006 and then turn to guidance for the remainder of the year.

First, I'd like to provide a quick recap of some of the details from our strategic alliance with King Pharmaceuticals. We closed the strategic alliance in December 2005. In connection with that closing King paid us $150 million in cash in an up-front payment. King is also obligated to pay us $150 million in cash based on the successful achievement of certain clinical or regulatory milestones for Remoxy and three other abuse-resistant opioid painkillers. King funds all the development expenses and is obligated to pay us a 20% royalty on net sales of drugs, except for the first $1 billion of cumulative net sales, for which the royalty rate is set at 15%. King has worldwide commercial rights to Remoxy and three other abuse-resistant drugs developed under the alliance.

With that, I'd like to turn to the P&L. We show a profit for the first quarter. The is a first for us. The profit is driven by the non-cash program fee revenue, from the amortization of the $150 million upfront fee paid to us by King. Generally accepted accounting principles call for such payments to be recognized over time. We recognized $6.6 million in program fee revenue during the first quarter. We expect to recognize the remainder of the $150 million as program fee revenue each quarter through mid 2011.

Second we have the $8.8 million of collaboration revenue from the reimbursement of expenses we incurred in collaboration with King during the first quarter.

In our operating expenses for the first time in the first quarter of 2006, we included non-cash equity-related expenses for options under statement of financial accounting standards number 123 revised, which is also know as FAS 123R. We adopted FAS 123R on January 1 of this year on a prospective basis. Total non-cash equity-related expenses in the financial statements are $1 million for research and development; $700,000 for general and administrative expenses for a total of $1.7 million in total for the first quarter. Under FAS 123R we estimate this non-cash expense using an evaluation tool called black-shoals under assumptions that are further described in the notes to our financial statements. And information about options for the first quarter of 2005 will be included in the notes to the financial statements on our quarterly report on form 10-Q. We expect those reviewing our financial results will find it straight-forward to separate out these non-cash expenses from our other cash-based operating results.

Research and development expenses increased this quarter to $12.8 million. This total is before reimbursement of the collaboration expenses from King. The increase stems primarily from the timing of clinical and development activities for Remoxy and other abuse-resistant product candidates as well as other non-cash equity-related expenses from that adoption of FAS 123R. In particular, this total includes the expenses for activities that led to the commencement of the Remoxy phase III trial under our special protocol assessment. R&D expenses for Oxytrex and other research and development were lower in the first quarter. During the beginning of 2005, we had R&D expenses related to two phase III trials of Oxytrex, which were both completed during 2005.

Our general and administrative expenses were higher in the first quarter as well. In particular we included approximately $700,000 in non-cash equity related expenses for options that were granted in first quarter and in prior years. Otherwise, our G&A activities and spending have not changed dramatically for the first quarter of 2006.

Our interest income increased in connection with our higher cash balances and higher average returns during the first quarter and contributed $2.1 million to the bottom line. All of this leads us to a profit before taxes of $2.6 million for the first quarter again, driven by the non-cash program fee revenue recognized during that time. We have provided for income tax expense during the first quarter. This is a fairly unusual topic for earnings call for a biopharmaceutical company like us.

The $150 million upfront fee from King not only provides incredible strength to our balance sheet, but in addition we'll realize the benefit of some of our tax carry-forwards from prior years in calculating our taxable income for 2006. Tax rules are different from GAAP when it comes to recognizing the $150 million upfront fee from King. Almost all of that payment will be recognized as taxable income in 2006, which of course, results in a large amount of taxable income in total for the whole year. We'll use our net operating losses from prior years in tax credits to offset this taxable income. But the tax laws limit the amount of carry-forwards we can use in calculating alternative minimum tax. So we will have an alternative minimum tax for 2006. We've estimated the total alternative minimum tax for 2006 to be about $2.6 million, which we expect to pay in 2007.

Our results for the first quarter of 2006 include a provision for tax of 1.7 million representing a portion of the full year alternative minimum tax appropriate for the first quarter. The amount we recognize each quarter for this alternative minimum tax will fluctuate given the profit or loss before taxes for that quarter. So our after tax profit is 877,000 driven by this non-cash program fee revenue from the alliance with King.

We'll move to touch on some features from our very strong balance sheet. We used about $3 million during the first quarter primarily to fund our operating expenses. We finished the quarter with about 210 million or just under $5 a share in cash. Also on the balance sheet we have 4.2 million for collaboration revenue receivable. This reflects what expenses we incurred in connection with the collaboration with King that King will pay us in the second quarter.

On the liability side of our balance sheet, we have deferred program fee revenue current portion and non-current portion. Just to emphasize, this deferred revenue is not debt. These balances relate to the $150 million upfront that King paid us in December. The current portion is what we expect to recognize in the next four quarters through the first quarter of 2007 as program fee revenue. The non-current portion will be recognized thereafter.

For the rest of 2006, we are going to keep our focus on guidance on total cash. We continue to see overall cash flow for 2006 to be a net cash usage of about $15 million plus or minus 10%. Our future research and development expenses for Remoxy and other abuse-resistant product candidates under the King alliance will be reimbursed by King. We expect the amount we incur in R&D under the King alliance to grow in the future. But the increase doesn't affect our bottom line because all these expenses will be reimbursed.

In 2006 outside of the abuse-resistant franchise we'll focus on Oxytrex and we'll expect to see increased expenses for clinical trials for Oxytrex later this year. Given the nature of our operations, you should expect our gross research and development spending to fluctuate over the quarters given the timing of our clinical and other third-party R&D activities. As I mentioned on our general and administrative expenses, we don't see those costs increasing significantly in 2006.

We think we'll spend about $22 million, net of reimbursements, on our activities offset by interest income on our portfolio of investments of about $7 million to $8 million. This brings us to our estimated cash flow for the year of about $15 million plus or minus the 10%. While our guidance focuses on cash, there are three significant non-cash related items in 2006 that will continue to flow through our income statement - in revenue the amortization of the program fee that I've already discussed; in operating expenses, the non-cash expenses related to stock options; and third, these taxes.

So to sum up, we have an incredibly strong cash position of about $210 million now with a modest cash usage of about $15 million for 2006, just under $5 in cash per share. We have no debt. So we have the financial strength to develop our late-stage pipeline addressing drug safety. We are underway with our new and exciting strategic alliance with King that serves as a pathway to commercialization.

Now I'll turn the call over to Remi Barbier, our President and CEO.

Thank you, Pete. Very nice job explaining what might otherwise be perceived as complex financial results.

For those of you who don't know Pete, he has been with us for about six years – four years, I'm sorry – as our VP of Finance and Chief Financial Officer. Prior to this he was a CPA at Price Waterhouse Coopers and has about 20 years of biotech experience. So a very, very highly experienced person.

About three months ago, when we had our conference call, I indicated that I believed that 2006 would be a transformative year for Pain Therapeutics. I think, as you can tell by our operating financial results, it is shaping up to be a transformative year. Obviously we do not anticipate sustained profitability this year, in 2006. But given our deal with King Pharmaceuticals, we do expect to produce some very nice financial results from quarter-to-quarter.

We are very excited about the prospects of the Company. In fact, in my eight years at Pain Therapeutics, I have never been more excited about what is on our plate. Someone once described our pipeline as a franchise in drug safety. I like that because that really reflects what I believe our pipeline to be. Our pipeline right now consists of four products. Remoxy, which is an abuse-resistant form of twice-daily oxycodone. Oxytrex, which is a strong opioid painkiller with minimal physical dependence. Right behind that we have two earlier-stage programs with two other abuse-resistant opioids.

Let me say a few words about Remoxy and then Oxytrex. Then we'll open it up for Q&A.

For those of you who don't know us too well, Remoxy is an abuse-resistant form of twice-daily oxycodone. It contains the same active drug ingredients and the same dosing frequency as the leading twice-a-day oxycodone form that is on the market. But unlike the leading form that is commercialized today, Remoxy has a number of abuse-resistant features. This includes the inability to extract the oxycodone, the stuff that gets abusers high via either snorting or crushing or injection or any type of thermal extraction. Where Remoxy really shines, certainly in my opinion, is that high-proof alcohol does not dissolve Remoxy. This is very, very important. It is important because, if you go back and look at the DEA numbers and a number of publications that have been studied, a lot of cases of abuse and overdose with opioids occurred when long-acting opioids were crushed or mixed with high-proof alcohol. As a matter of fact, the FDA withdrew from the market a long-acting strong opioid called [palledrome] – I am going to say about a year and a half ago specifically because the sustained release technology dissolved in alcohol. So we think going forward, strong opioids in particular will need to show some resistance against alcohol and really a high-proof alcohol.

Opioid abuse. Let's talk about this for a second. It is a national problem. It used to affect a very narrow niche of Appalachia really – but that's several years ago. Now it pretty much affects all demographic groups and social classes. As I understand it, opioid abuse has become one of the top ten forms of recreational abuse for young people under 30. The burden of oxycodone abuse falls not just on the ERs, which is fairly obvious, but also on physicians, on managed care, and on the pharmacists. A number of investors have asked me to quantify the impact on managed care – the impact of oxycodone abuse on managed care. The good news is you don't have to believe us. You can go to the literature and look up a number of articles. In particular, one of the thought leaders in managed care, a fellow named Dr. Katz, published an article last year showing that in an insured population oxycodone abusers cost the health care system approximately $16,000 per year versus non-abusers who cost the health care system under $2,000 a year. That is an eight-fold increase for managed care simply due to opioid abuse. This is why we are confident that managed care will reimburse us for Remoxy and other forms of abuse-resistant opioids.

The other thing that perhaps is not well-known is the impact of oxycodone abuse on the pharmacists. Pharmacists, as some of you might realize, are the unsung heroes of the health care chain. When it comes to oxycodone, only 20% of pharmacists in urban areas stock twice-daily oxycodone. This is for a very simple reason. This is because over 12,000 pharmacies were robbed between 2000 and 2003 and because most opioid theft takes place at the level of the pharmacy.

Finally, the burden of oxycodone abuse really falls squarely upon the physician. More and more I am hearing physicians say, I will prescribe anything but twice-daily oxycodone. The reason for this is fairly straight-forward. There are a large number of legal actions and civil lawsuits and a lot of government allegations – or I should say allegations by government agencies that doctors over-prescribe oxycodone. This leads also to problems for the physicians in terms of potential for abuse and diversion and also for potential of litigation. In addition, the insurers have jumped into the fray by actually writing – sending out directives to doctors to try to get them to change their prescribing habits away from long-acting opioids.

All this to say that the market for twice-daily oxycodone, as it stands today, is dropping in dollar volumes. But it is actually increasing in volume. By this I mean that the market for oxycodone was approximately $2 billion at the height, which was approximately 2004. As I understand from IMS, the price drops we're seeing now are about 44%. However, despite a 44% price drop, we are seeing again about a 10% increase in number of scripts for long-acting opioids in 2005.

So, where are we? We have an abuse-resistant form of Remoxy, which is well into phase III clinical trials. Our goal is to have 40 clinical sites up and running by the end of this quarter. We are well on track. We have approximately 20 sites right now. We're about half way there. Patients have started to enroll. Things are going very well. There is not a whole lot to announce on the clinical front.

Let's switch over to Oxytrex. Oxytrex – we had phase III results that came out last year. We feel the results were very indicative that this product produces pain relief with minimal physical dependence. Having said that, we had an in-person meeting with the FDA in March. We feel that the outcome of the meeting was highly encouraging for a number of reasons. First of all, the FDA confirmed with us that the clinical results to date support the ongoing development of Oxytrex. That is very important confirmation for us. Oxytrex lives and we will continue to develop this product.

Second of all, the FDA has told us that physical dependence itself is an acceptable endpoint. Third, they gave us the nod that broad-label approval is an appropriate goal for an Oxytrex program. And last, they gave us the go-ahead to use a titration design to reduce and to minimize the patient dropout rate that we've had and other companies have seen with opioid studies in the past.

We have taken all of these data points. We are now formulating a pivotal phase III clinical program that we expect to initiate some time around December, certainly by January – December of this year, January of next year. Please don't ask the details of the program yet because we don't have it. We are still talking to the FDA about some tactical decisions. I can say that in general we're probably talking about two smaller studies where the endpoint would be physical dependence. It would be a direct comparison of Oxytrex to oxycodone.

With that, before turning it over to Q&A for a few minutes, I'd like to let our investors know that I have been spending quite a bit of time on business development efforts. In particular over the past eight years we have built, what I would call, a first-class clinical development program. We intend to leverage this clinical development infrastructure over a number of different programs – drug development programs and possibly therapeutic areas.

Specifically the three therapeutic areas that are of strong interest to us are obviously pain and addiction because that is what – those are our roots. The other area of interest is CNS in general. The third area of interest is hematology oncology. I want to be on record as saying that if we [end-license] anything, it will be very, very selective. It will be following the model that we have used to date, which is to say invest approximately $10 million to $12 million per program to determine if a lead compound actually presents a real drug program for us.

Nothing really to announce other – no specific programs to announce other than we are very active. We have a number of potential products that we're putting through the vetting – the scientific, clinical, and marketing vetting process both internally and externally.

With that we have about 10 minutes or so for Q&A. Carney.

Angela, can we please open the lines for Q&A now.

(OPERATOR INSTRUCTIONS) Andrew Swanson with Citigroup.

Thanks very much. I know it's probably a little premature to think about the pricing in Remoxy. Although I suppose it's more fun to talk about pricing than it is approval or non-approval. Can you talk about how you are thinking about pricing as we continue to see generic oxycodone make inroads into the market, priced probably now something along the lines of 15% of the branded price. Are you still confident in your ability to make price to generic oxycodone and still have this be a substantial market opportunity for the Company.

I think you and I have had this discussion before. Let's have it one more time. Oxycodone as a strong opioid painkiller has been around for approximately 80 years – 80 years. That's a long time. During these 80 years, oxycodone has seen three distinct life cycles. The first was immediate release when it was initially developed in the 1920s. At that time, it was really a direct substitution for morphine. But really, sales were not that important and the entire drug kind of fizzled out. Until approximately the 1970s when a couple of different pharmaceutical companies had the right idea of combining oxycodone with an [end-set], a non-steroidal anti-inflammatory agent. These became known as percocet and percodan and microprofen and so forth. At that point, the market for oxycodone went through the roof. I believe it hit approximately a billion. So essentially it went from a couple hundred million to $1 billion simply by adding an end-set to it. That's the second generation.

The third generation of oxycodone was the – occurred in about 1996, 1997 when Purdue came out with a much more convenient form of oxycodone. Purdue went from four-times-a-day to twice-a-day. The mere convenience of four-times-a-day increased the market from a few hundred million to $2 billion.

What I am saying is that consistently – here we have 80 years of data points – consistently through the years – through the decades, I can say, premium pricing has been the norm for unique, value-added opioid drugs that has no substitute. We anticipate this trend to hold forth going forward. Certainly, if people are willing to pay a huge premium for better convenience, we think the managed care system will also pay a premium, not just for better convenience, but for better safety, less potential litigation, less diversion, and so forth.

The other side of your question is, where is the bottom of the oxycodone market? That I do not know. Nor do I know of anyone who has a precise answer. What I can say is that again, IMS tells us that the price of oxycodone has dropped about 44% in the 15 months since the generic form came on the market. Having said that, if you look at the twice-a-day generic versus the four-times-a-day, we're still talking about a 40%, approximately 30% to 40% price [streaming]. So again, it's a constant theme. It's not just with opioids. It's with all drugs. Premium pricing is the norm for unique value-added drugs that have no substitute, especially when it comes – when it concerns safety. It's a little bit of a long-winded answer. I really wanted to nail this because a number of people have asked me consistently.

It's very helpful. Thanks very much.

James Molloy with Oppenheimer.

Thanks for taking my call. Just a quick housekeeping question on the lab operation revenue. Is that tied in directly to the R&D and is an offset? It was just because of timing that there was a difference there? Or is that something that we should expect to see consistently going forward?

I think I would point to the receivable on the balance sheet. Each quarter we'll incur some – the expenses on the – in connection with the alliance. Then King will pay us. There is a portion that is incurred in one quarter that is paid in the next. You should always expect to see a receivable on our books. On the income statement, those expenses are matched on a one-for-one basis.

Remi, your thoughts on Oxytrex. A little bit of talk in the press release on the new ultra, ultra low-dose of naltrexone. Do you think this will be the cornerstone for Oxytrex making it through? Or do you think the new trial design will be what will make this drug work?

I think a combination of all of the above. If you look at our clinical results on Oxytrex to date, Oxytrex does separate from oxycodone in direct head-to-head comparisons. However, because our – if you go back and look at our trial design to date, it's been a twice-a-day versus four-times-a-day comparison. A number of investors have said, the twice-a-day versus a four-times-a-day confuses me. What can you do to simplify the program?

This is part of the tactical discussions we are having with the FDA right now. I guess if I were to give some guidance – I guess I will. We are looking possibly at a direct head-to-head comparison of Oxytrex versus oxycodone with the 0.0001 formulation. By this I mean four-times-a-day Oxytrex versus four-times-a-day oxycodone. Bingo. I think that will perhaps ease the ability of more of our constituents to interpret our results.

Thank you very much for taking the call.

George Fulop with Needham & Co.

Thank you for taking my question. I apologize – I hopped on a bit late – if you went over it. Can you go over the clinical potential, the regulatory advantage of the 0.001 milligram tablet? Is it based on your research or the existing research? What the regulatory? Is it as opposed to homeopathic level?

No, we didn't – we don't believe in homeopathy as a therapeutic class. There are those who do. As you know – and I believe your background is in CNS. Knowing CNS, it takes very, very minute amounts to shift the balance of chemicals in the brain. Certainly in the combination of opioid ultra low-dose opioid antagonist with an opioid agonist it has that – it plays right into that effect.

What we are talking about is, if you go back to our fundamental – if you go back to the fundamental science, what our scientists have consistently told us is that lower is better. The lower the naltrexone dose, the better the clinical and pre-clinical effects. We believe this. We have seen this consistently in our own efforts. Our last dose, the dose that we used in our last phase III clinical trials, was 0.001. Now we are able to go tenfold lower. By going tenfold lower, we think the regulatory and clinical advantage includes doing a four-times-a-day comparison of Oxytrex to oxycodone and still go much lower in naltrexone dose compared to where we were with twice-a-day dosing. In terms of a regulatory advantage, it is clear that if you can do a direct comparison of four times versus four-times-a-day, the data speaks for itself – or we think the data will speak for itself. When you combine what the scientists have been telling us that lower is better coupled to regulatory advantages of a head-to-head comparison of Oxytrex to standard-of-care, the think this all can translate into not just a brilliant technical achievement by our tech ops group here, but into an advantage for our clinical program.

Thanks for that update.

Annabel Samimy with UBS.

This is Mani Mohindru filling in for Annabel. A quick question on Remoxy. In the present trial that is ongoing, are you at all looking at the time to onset of pain relief? The reason for my asking this is because – is there any kind of indication that your formulation would have an effect in the release of drug in the blood?

I am not sure how to interpret the second part of your question. I can easily answer the first part. The time-to-effect is not part of a – typically never part of a chronic pain study. These patients are in severe chronic pain. The pain by definition has been ongoing for months, if not years. Whether the action takes place within four hours or five hours, that is really not the criterion for approvability. Nor has it ever been to my knowledge, the criterion for approvability for a long-acting opioid. Having said that, what we are offering is a twice-a-day formulation that, in the marketplace we believe, can compete head-to-head with the existing commercial forms of twice-a-day formulations. Does that help?

Yes. Thank you.

I think we have time for one last question.

Sanjay [Delvani] with BAM.

I apologize if I missed this. Could you clarify why the Oxytrex trial versus oxycodone will be dosed four-times-a-day instead of twice-a-day?

Oxycodone is a product that is approved – again, it's an 80-year-old product, an 80-year-old drug. It has always been used four-times-a-day. That is the appropriate FDA prescribed way to use oxycodone, except in the presence of a long-acting mechanism in which case it is dosed twice-a-day. With Oxytrex because the antagonist, the naltrexone provides not just minimal physical dependence, but also seems to prolong and pronounce the analgesic effects. To date we have had a twice-a-day comparison of twice-a-day Oxytrex to four-times-a-day oxycodone. That has confused a number of people. What we are proposing is that by going lower in dose with naltrexone, by using the 0.0001 milligram of naltrexone per Oxytrex tablet, we can dose four-times-a-day without overdosing patients on naltrexone. This all plays into the fundamental science, which says lower is better. This is the consistency.

I see. So the trial is versus oxycodone IR, not the ER?

Correct.

So the ultimate objective is for Oxytrex to be dosed four-times-a-day?

No. If you want to talk about ultimate projection, the ultimate is a combination of – is putting a sustained release formulation into Oxytrex so that we go from four-times-a-day to twice-a-day. We can do this using our Remoxy platform. In essence, the ultimate is a convergence of Remoxy plus Oxytrex, the so-called Remoxytrex.

Understood. But Oxytrex in terms of the trials you plan to start later in the year, that will be for a 4X dosing of Oxytrex?

Correct. And this part of our strategic discussions with the FDA where they – in essence, they urged us not to jump the gun and go directly into twice-a-day when in fact the immediate release is prescribed four-times-a-day. Going from an approvability of Oxytrex to a sustained release version of Oxytrex, we think is a relatively low hurdle. We can do this, we think, very fast, very cheaply, and do it right. Whereas going right into a twice-a-day version of Oxytrex – perhaps that might have been jumping the gun a little bit fast.

Just for comparison, Remoxy is being studied – it's a 505(b)(2) referencing oxycodone ER. Is that right?

You are correct.

Thank you.

Gentlemen, at this time that concludes our allotted time for the question and answer session. I would now like to turn the call back over to management for the closing remarks.

Thank you very much for participating in today's call. We look forward to providing you updates over the course of the year.

Ladies and gentlemen, this does conclude your presentation. You may now disconnect. Thank you. Have a wonderful day.