Kevin Gorman – President and CEO
Claudia Woodward – IR
Tim Coughlin – VP and CFO
Chris O’Brien – Chief Medical Officer
Sarah Slisko [ph] – Morgan Stanley
Ryan [ph] – Oppenheimer & Co.
Matt Duffy – BDR Research
Jason Napodano – Zacks
Neurocrine Biosciences, Inc. (NBIX) Q3 2008 Earnings Call Transcript October 28, 2008 5:00 PM ET
Good day, everyone, and welcome to today’s program. At this time, all participants are in a listen-only mode. Later, you will have the opportunity to ask questions during the question-and-answer session. (Operator instructions)
Please note this call will be recorded. I’ll be standing by if you should need any assistance. It’s now my pleasure to turn the conference over to Mr. Kevin Gorman. Go ahead please.
Thank you. Welcome to our third quarter earnings call. Today, I’m joined by Tim Coughlin, our CFO; Chris O’Brien, Chief Medical Officer; and Claudia Woodward, in charge of Investor Relations. What we’d like to do today is Tim will take you through our financials, Chris will give you an update on our R&D programs; and before we’d start, I’d like to turn it over to Claudia Woodward now for our Safe Harbor Statement.
Thanks, Kevin. Good afternoon.
I want to remind you of Neurocrine’s Safe Harbor Caution. Certain statements made in the course of this conference call will state the company’s or the management’s intentions, hopes, beliefs, expectations or predictions of the future, are forward-looking statements which are subject to risks and uncertainties. Information concerning factors that could cause actual results to differ materially from those contained in or implied by the forward-looking statements is contained in the company’s SEC filings, including but not limited to the company’s annual report on Form 10-K, and quarterly reports on Form 10-Q. Copies of these filings may be obtained by visiting the Investor Relations page on the company’s web site at www.neurocrine.com. Any forward-looking statements are made only as of today’s date and we undertake no obligation to update these forward-looking statements to reflect subsequent events or circumstances.
Thank you, Claudia. Tim, can you take us through the Q3?
Thanks, Kevin, and good day to everyone.
During the third quarter of 2008, the company continues to perform on its financial plan and ended the quarter with $118 million in cash and investments. We had a loss during the quarter of $17.7 million or $0.46 per share. Our year-to-date loss is $59.8 million or $1.56 per share. This compares to a loss of $79.3 million or $2.09 per share during the first nine months of 2007. The main difference between the two periods is the cost savings we realized under a severance program enacted in the fourth quarter of 2007 and other cost saving measures implemented throughout the company.
Research and development expenses decreased from the second quarter of 2008 to the third quarter of 2008 by approximately $3 million. This decrease is due to completion of the dosing portion of the 603 study during the second quarter of this year. As well as startup costs were incurred for the 702 and 703 Elagolix studies during the second quarter.
General and administrative expenses were less in the previous quarter primarily due to decrease in non-cash expenses under FAS 123R. Additionally, we’ve been focusing our efforts on reducing external vendor costs which has also resulted in a decrease of G&A expense.
Interest expense is consistent from period-to-period. However, income from investments decreased in the third quarter as a result of overall macroeconomic conditions.
We are performing according to plan. However, during the fourth quarter of 2008, we will incur a one-time, non-cash CCs [ph] liability related to our consolidation of the company into the back building of our two-building campus. The CCs estimate anticipates the ultimate cost that we will incur to successfully lease out the entire vacated space of the front building. We have now finalized the estimate of this liability at this time and are currently marketing the building for lease.
We again reaffirm our guidance of $75 million to $80 million loss for 2008, excluding the previously mentioned CCs impact. Additionally, we will end the year with approximately $100 million cash and investments.
Turning to our balance sheet at September 30, 2008, we have a fair market value of $118 million in cash and investments at quarter end. We took a very conservative position on investing funds approximately five months ago by moving the majority of our assets into federal-backed instruments. Our current funds are primarily invested in federal-backed money markets where the bank has elected to participate in the 90-day treasuries, temporary guarantee program for money markets, or they are invested in US Treasury-backed money markets.
We have approximately $21.3 million in auction rate securities with a stated par value of $22.6 million. These are carried as long-term investments in our balance sheet. Two-thirds of these auction rate securities are maintained by UBS. On October 7, UBS extended an offer of auction rate securities rights to holders of illiquid auction rate securities that were maintained by UBS as of February 13, 2008. This offer period closes on November 14, 2008. The offer from UBS allows companies to regain their auction rate securities at par value at a pre-specified date. We have elected to participate in this program with UBS as it provides us with a fixed reduction date of June 30, 2010 for approximately $15 million of our auction rate securities at par value.
For our entire investment portfolio, only $7 million of auction rate securities remain without a definitive par value liquidation date. However, all of our auction rate securities remain at AAA rating and continue to pay according to their penalty terms. So from a cash and investments perspective, we’re very strong and very liquid with in excess of two year's of cash on hand.
The rest of the asset side of our balance sheet includes long-term assets of restricted cash which is related to our security deposit on our lease buildings and other non-current assets which are comprised of deferred compensation-related investments. We still have the land and buildings on our balance sheet, even though they were sold last year in a sale leaseback transaction. This is due to the fact that as part of the sale leaseback transaction we negotiated a repurchase option. Until the expiration of this repurchase option, these assets along with the related $109 million long-term liability remain on our balance sheet. Upon expiration of this purchase option, the fixed assets and $109 million liability will be removed from the balance sheet and be replaced with a non-cash deferred gain liability related to sale of the property.
Aside from basic tables and accrued expenses, the liability side of our balance sheet includes $15 million in deferred revenues. A non-cash liability is being amortized in the revenue. Our liabilities also include the previously mentioned $109 million leaseback financing obligation and another non-cash liability. We currently have only $276,000 of debt and by year end, on our balance sheet will have no long-term debt remaining. The remaining liability item is a $3.6 million, a line item denoted as long-term other liabilities. And this presents a deferred compensation plan liability and it is a direct offset to the previously mentioned deferred compensation balances including another non-current assets.
In summary, we have a very strong liquid balance sheet with $118 million in cash and essentially no debt.
With that, I’ll turn it back over to you Kevin.
Thank you very much, Tim. It’s encouraging to see as you will note that we’ve been hitting all the numbers that we gave guidance on at the beginning of the year. And also, I believe Tim has done an outstanding job in putting our money in some of the safest securities that can be found in the turbulent markets that we’re in. What I’d like to do now is turn the rest of the conference over to Chris O’Brien as he can take you through our R&D programs.
Thanks very much, Kevin, and good day for the callers. We’ll start with the Elagolix program, the GnRH small molecule antagonist. As many of you know, we released very positive and encouraging results from the Elagolix 603 study also known as the PETAL study. We held a conference call a few weeks ago and went through the top line results from the six-month treatment period. And in that study, very happy that we hit the primary end point, the secondary end point, showing both statistical and clinical significance on these measures.
In addition, the study confirmed that this really is an unmet need as the number of callers that we had that was interested in this trial and the enthusiasm of the patient’s subjects and investigators has really been palpable. We confirmed that pain reduction can be accomplished without a significant risk of bone loss, and as you know, this trial involved also a six-month no-treatment phase after the treatment period, and we still have women involved in this part of the trial. The last DEXA scan from week 48 for the last subject will be later this year and then we’ll be able to close down the study, finish the cleanup of the data, and lock the database to get final results later in 2009.
So 603 study very successful and helped us with encouragement that our once-a-day dosing program was the correct way to move forward.
As you know, we had a second study called the Lilac PETAL study, also known as the 702 study, and this study has also been going along quite nicely. As I mentioned on the call in September, we've fully randomized 155 subjects in the double-blind placebo controlled portion of the trial and we anticipate reporting top line results for the first three-month section of this study, that is the double-blind placebo controlled section, toward the end of Q1 2009.
The study of course continues beyond that first three months. It’s a six-month trial and women who had been on placebo during the randomized placebo controlled section would then re-randomize to one or two doses of Elagolix, thereby giving us an opportunity to look at some additional DEXA scan data after six months of treatment including the higher dose 250 mg dosing program. The top line results from this trial, I’ve mentioned and then the remainder of this study results would be mid-year next year from the six-month portion.
You also know that we have a 703 study. This is the trial that was set up in Central Eastern Europe and it’s a very similar trial design in that we have placebo compared to Elagolix 150 mg and Elagolix 250 mg as the main comparators in the trial. We added a fourth dosing arm, that is Lupron, because we need to gather some data on a Lupron versus placebo, so that we can justify a statistical margin for any future non-inferiority trials that we might have to do to secure the European registration. As you know, there’s an expectation for active comparator trials and to do a non-inferiority trial, you have to have justification for the margin used.
For this trial, we have in five countries in Central Eastern Europe, 22 investigator sites, and a group of subjects waiting to begin the trial. We are dependent on release of clinical supply material. We expect to hear about the ability to release that material later this week, but we’ll keep you updated on that. That means that we should remain on track for top line date in 2009. The goal again is to have that data in addition to the 702 and 603 and the other studies in hand at the time of our end of Phase II meeting that we will seek with the FDA in late 2009.
It’s also worth mentioning that in these two trials, the 702 study and the 703 study, we’re using a tablet of Elagolix that’s a new formulation. Last year, we developed an Elagolix tablet that had improved manufacturing characteristics. Specifically, we saw that tablets had the optimal hardness required for the manufacturing process and the right size for commercial considerations. Once we develop that formulation, we have put it in to a formal pharmacokinetic trial last year. The study was completed and we confirmed that the PK profile of the new tablet was equivalent to what we have seen in the earlier studies. That study was successful, so we have included that tablet in the 702 and 703 trials. Again, this was for commercial kind of manufacturing characteristics rather than trying to alter PK profile.
So the Elagolix program is moving well. We have a lot of momentum. We’re very happy with the way the trials are enrolling and encouraged by the comments and feedback that we’re getting from subjects, investigators, and even the subjects, our Primary Care doctors are telling us they like what they see. So all good things in the Phase II environment.
So behind the Elagolix program, of course, we have two other Phase II programs. The Urocortin program is the CRF 2 peptide agonist for heart failure and other cardiovascular disorders. As I have mentioned on these calls before, we had set up to complete some GLP toxicology studies to confirm what we had seen internally at Neurocrine with our non-GLP studies. I’m happy to say that those GLP tox studies have been successfully completed, and now we are just in the process of starting to get the histopathology from those studies. We expect the last of that to come in December, and then we’ll have that tox package complete.
At that point, we can begin to explore potential partnering options which, as I have mentioned before, our goal with Urocortin 2 is to find a partner that will be able to do a full cardiovascular development effort that a drug like Urocortin 2 requires. This is not something that we are in-house currently set up to exploit fully, so we’ll begin to engage potential partners after the tox data is all in.
Behind Urocortin 2 is the CRF 1 receptor antagonist. This is the GSK partnership that has been going on now for a number of years and as you I think are aware, GSK initiated a Phase II trial in major depressive disorder with a target enrolment of 150 subjects treated with either the molecule that we shorthand at 679 or placebo for six weeks. This is a US trial that began in August and is expected to be report out in about 24 months. The back-up compound for 679 is 529, and this trial is in the midst of Phase I studies as a backup for 679.
In addition, the 008 compound, as you know, GSK has said that they will release data from the irritable bowel syndrome trial at some point the second half of the year and we are awaiting those results from GSK.
So Elagolix, Urocortin 2, CRF antagonist, the Phase II programs – some other information to share with you. We’ve mentioned in the past that we have a very productive discovery and preclinical group that continues with more than a dozen targets that we hope to bring to the point where we can introduce INDs every year going forward, and we’ve been very happy with the progress made on one of the initiatives that is a target after something called VMAT2, Vesicular Monoamine Transporter 2. This is a presynaptic neuronal target that inhibition of this would be useful on a variety of central nervous system disorders. And we have a compound that is just now completing these preclinical studies, and we have sufficient data to prepare the regulatory filings that will allow a first trial in humans to begin early in 2009. This molecule has several potential indications within CNS space, including hyperkinetic movement disorders. We’re very excited about this and looking forward to starting that up in 2009.
In addition to VMAT2, as you know, we have continued to try to get some closure on Indeplon. As I’ve mentioned before, we had our end of review meeting with the Neurology Division of the FDA last July. We’ve been in the process of exchanging draft minutes with the FDA, corrections to the minutes and comments that have been going back and forth. Currently, the last round of this has been sent back to the FDA and is currently under their hands, under their review, and we await to see their comments. We actually can’t provide any specific comments as to Neurocrine's next steps with Indeplon until we have those final minutes.
With that, perhaps I can turn it back to Kevin and he can make some other comments.
Thank you very much, Chris. So as you can see, we’re very pleased. The Elagolix program is moving briskly forward. We’re meeting our timelines. The 603 data, as we’ve discussed before, was a very successful trial. We’re moving forward with this program. It is a very high-value program for the company as we continue in discussions with multiple parties on that. As you can see, as Chris pointed out, there are a number of preclinical programs that we have working at Neurocrine and the first that you’re going to be hearing more about in our coming calls and visits is going to be on that VMAT2 program as that moves into the clinic.
With respect to Indeplon, I’d just like to close with one thing that, as Chris said, we do not have final minutes from the FDA. We await those final minutes. However, even upon receipt of those final minutes, my guidance remains the same as that I do not believe there’s going to be a fundamental shift in the requirements that the agency has put in front of us at this point in time.
So with that, what I’d like to do is open it up for your questions at this time.
Thank you. (Operator instructions) Our first question comes from Sapna Srivastava with Morgan Stanley. Go ahead please.
Sarah Slisko – Morgan Stanley
Hi, this is actually Sarah Slisko [ph] calling in for Sapna. You said you’ll have $100 million in cash by year-end and it seems like you’re going to have three programs with your new pipeline candidate coming into the clinic in early ’09 and I was just wondering if you can discuss how you plan on prioritizing those programs and whether you think you’ll need to approach the public markets next year?
Thank you very much. We do not have any plans of approaching the public markets. Secondly is that we – with our programs, the GnRH program fully baked into our projections going forward, as we’ve said, as Tim said, we have over two years of cash in hand, is the fact that we would be completing out that Phase II program with Elagolix.
Secondly is with the VMAT2 program, that is one where, as you’ve seen, we’ve been husbanding cash. We’re careful on our costs constraints. And so we will pursue that in the clinic as funds became available, external funds become available into the company but we are not talking about approaching the public markets.
Sarah Slisko – Morgan Stanley
And also, it’s fair to point out that the Urocortin program is one that we’re not funding additional clinical initiatives as we seek potential partners to that, and the GSK CRF program is a fully-funded program through GSK.
Sarah Slisko – Morgan Stanley
Great, thank you.
Thank you. Our next question comes from Brian Abrahams with Oppenheimer & Co. Go ahead please.
Ryan – Oppenheimer & Co.
Hi, this is actually Ryan [ph] for Brian. Just a quick question. So given the fact you guys have the blood level exposure with the PK between the two tablets, would we see any data that would correlate the blood level exposure with the BMD changes?
You will when the 603 study is done. As I’ve mentioned before, we have extensive PK/PD modeling that will come out of this 603 trial but, because we chose to show the top line data from the six-month treatment period before the study was complete, I’m not unblinded at an individual subject level yet. But when that’s done, we will have the kind of PK modeling that will allow us to look at the relationship between Elagolix exposure, estradiol level and bone mineral density change.
Ryan – Oppenheimer & Co.
Great, thank you.
Thank you. Our next question comes from Matt Duffy with BDR Research. Go ahead please.
Matt Duffy – BDR Research
Hi and thanks for taking my question. Given as you guys are thinking about potential partners in the future, do you have parameters that you’re thinking about for what you think would be optimal type of partner for Elagolix?
Sure, we have there are several that one can choose with. There would be those partners that are multi-national that would take the program in all three major markets in the world. There are those that are European-specific and then others that are Japan-specific. We’re pursuing all three of those right now. You also have partners that are exclusively focused on women’s health, others that are more focused on men’s health; those that are focused in both. Right now, I can tell you that my preference would be to have a partner that would be there for the North American and European markets and would fully exploit into the women’s health indications, obviously, primarily endometriosis, uterine fibroids; and then also would go into the men’s health because the compound is positioned to go into BPH at this point in time. So that would be my optimal but, having said that, we do have situations where there are companies interested in geographic regions and also those that are interested in specific diseases.
Matt Duffy – BDR Research
Okay, great. Thanks very much.
Thank you. Our next question comes from Jason Napodano with Zacks. Go ahead please.
Jason Napodano – Zacks
Hi, guys. Thanks for taking the question. I’m wondering if you could comment a little bit about getting back to the partnership discussions, if things have picked up a little bit here after the PETAL data came out in September or if you think partners are still waiting for the Lilac PETAL and the 703 study to end before they really show great interest? And the second question is and I’m sorry if I missed it in your prepared remarks, but will you guys be presenting the PETAL data at any medical conferences in the future?
Let me answer the second question first, Jason. Yes, we will, if not in the near future, as you know, the lead time required for abstracts at the important meetings like the endocrinology meeting for example, is typically something like nine months. And although I’m happy to talk about the top line data that we have, but I’m really interested in having this the rest of the story, the individual patient level data, the PK/PD modeling and things that are of great scientific importance. So I would say yes, in 2009, but nothing in the next few months.
Jason Napodano – Zacks
Jason, along the lines of your first question is that our business development since the 603 data has come out and also just prior to that, our business development group is completely engaged in partnering discussions. So the 702 data will come out early next year, but there does not appear to be any waiting going on for that data.
Jason Napodano – Zacks
Okay. Thank you.
Thank you. At this time, there are no further questions in queue. I’d like to turn the conference back to Kevin Gorman for any closing remarks.
Thank you. I would like to thank everyone for participating today. I think as you can see that we’ve done as we had set out at the beginning of the year to do. We’re right on track. We’re keeping a close rein on cash while keeping a very vigorous development program going with Elagolix. The data that’s being generated to date is outstanding. The program is moving along nicely as our all three of our programs, and now adding yet a next one to the queue in early of next year. In addition, we have done as good a job as I think can ever be expected in protecting our cash investments in this market, so I’m very pleased with that. So I look forward to meeting with many of you in the coming weeks and months. Thank you very much.
This concludes today’s conference call. You may disconnect your lines at any time. We thank you for joining us and enjoy the rest of your day.
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