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Dyax Corporation (NASDAQ:DYAX)

Q3 2008 Earnings Call Transcript

October 22, 2008, 10:00 am ET

Executives

Henry Blair – Chairman, President and CEO

George Migausky – EVP and CFO

Gustav Christensen – EVP and Chief Business Officer

Bill Pullman – EVP and Chief Development Officer

Analysts

Mark Monane – Needham

Katherine Xu – Credit Suisse

Phil Nadeau – Cowen

Jason Kolbert

Operator

Good morning, and welcome ladies and gentlemen to Dyax Corp’s third quarter 2008 earnings call. At this time, I would like to inform you that this conference call is being recorded and that all participants are in a listen-only mode. At the request of the company, we will open up the conference for a brief question-and-answer period at the end of the presentation. Before turning this call over Henry Blair, Chairman, President and Chief Executive Officer of Dyax, the company will read their Safe Harbor Statements.

Unidentified Company Speaker

This morning, Dyax issued a press release concerning its third quarter 2008 financial results. Dyax would like to remind everyone that statements made today reflect its expectations of future programs, collaborations, strategies, and financial performance and are forward-looking statements. These statements are based on management's current assumptions and are subject to risks and uncertainties that could cause actual events and results to differ materially. Important information concerning these risks and uncertainties is contained in Dyax's press release today and described or referred to in its most recent Form 10-K and other periodic reports filed with the SEC and are also available on the company's web site at www.dyax.com. I will now turn the call over to Henry Blair. Henry?

Henry Blair

Thank you. Good morning and thank you for joining Dyax's 2008 third quarter earnings call. Before moving to financial highlights and developments for the quarter, I want to take a moment to speak to the recently announced CEO transition plan. As mentioned in Monday’s press release on January 1st, I will retire from my role as President and CEO of Dyax. Gustav Christensen, our Executive Vice President and Chief Business Officer will assume these roles. Over the next several months Gustav and I will work closely together to ensure a smooth transition.

I will continue to be an active contributor as chairman of the board. As co-founder of Dyax and officer for nearly 20 years, I have had the opportunity to guide the company through an incredible evolution culminating in our first BLA submission for DX-88 a product discovered through our proprietary phage technology. With market launch on the horizon Dyax is transitioning from a research and development company into an integrated and commercially focused organization. I’m confident that under Gustav’s leadership, Dyax will successfully complete the transition to this exciting new stage.

Since joining Dyax in April, 2007, Gustav has had a leading force behind the strategic partnerships driving Dyax growth in this transitional year. His experience and background are ideally suited for this leadership role and I have every confidence that he will build upon the momentum at Dyax through multiple strategic opportunities.

Before we begin with a review of the quarter, I would like to introduce the senior management team joining me today. in addition to Gustav, Ivana Magovcevic-Liebisch, EVP and General Counsel; George Migausky, our recently appointed EVP and Chief Financial Officer; and Bill Pullman, EVP and Chief Development Officer.

Now I will pass the call to George to review our financial highlights. George.

George Migausky

Thank you, Henry, and good morning to all. I refer you to our press release from this morning for detailed results. However, I will cover certain financial highlights here.

Our total revenue for the third quarter increased to $5.5 million versus $2.6 million for the same quarter last year. Revenues for the first nine months of 2008 were $12 million compared to $7.9 million in 2007. While revenue increased by over 50% to $12 million in 2008, it is important to note that we completed new 2008 licensing collaboration agreements that provided the company with upfront cash payments of $38.2 million to date this year, excluding amounts under our Licensing and Funded Research Program, a program that we refer to as LFRP.

Of this $38.2 million, only $1.6 million has been recognized as revenue through the third quarter, with the balance deferred to future periods. So, accordingly we now have approximately $50 million of deferred revenue on our balance sheet as of September 30, 2008.

With respect to research and development expenses, for the quarter R&D increased to $16.5 million compared to $12.8 million for the third quarter of 2007 and for the first nine months of 2008 research and development expenses increased to $51.6 million versus $48.6 million for the same nine month period last year. And the year-to-date 2008 increase in R&D expenses are primarily related to developing DX-88 for HAE. Additionally, the effects of closing the Liege Belgium research facility are reflected in 2 places in our results. First, through September 30, 2008, the restructuring charges associated with this closure were $4.6 million and second the R&D cost savings in the third quarter resulting from the Liege closure were approximately $1.3 million.

In August 2008, Dyax entered into a $50 million loan agreement with Cowen Healthcare Royalty Partners. This was secured by the company's LFRP. Proceeds were used, in part, to repurchase an existing LFRP revenue interest held by Paul Royalty Fund. And in connection with this transaction, during the third quarter, we recorded an one-time charge of $8.3 million for the extinguishment of the original note payable with Paul Royalty Fund and the resulting net proceeds to Dyax from these loan arrangements were approximately $15 million, before transaction costs.

So excluding this one-time charge of $8.3 million, the net loss for the third quarter was $18.3 million and $64.6 million in the nine month period of 2008. Including the one-time charge, Dyax reported a net loss of $26.6 million or $0.43 per share compared to a net loss of $15.3 million or $0.26 per share for the same quarter last year. And for the first nine months of 2008, we reported a net loss of $72.9 million or $1.19 per share, and again this includes the one-time $8.3 million charge and that is compared to a net loss in the nine months period last year of $53.2 million or $1.05 per share.

With respect to our cash position, as of September 30, 2008, Dyax had a total of $74.5 million in cash, cash equivalents, and short-term investments and that is exclusive of restricted cash, and this represents an $11.1 million increase over our cash balance of $63.4 million at December 31, 2007.

Let me now provide some guidance with respect to our cash position. In preparation for Dyax’s first product candidate DX-88 to undergo regulatory review, we have made a number of important strategic decisions to ensure a strong financial and commercial positioning. For example, we have completed several strategic transactions in 2008 that have provided significant financial flexibility and resources.

As I just described, we completed a $50 million loan agreement with Cowen related to our LFRP revenues and that resulted in net proceeds to Dyax of approximately $15 million. In addition to greater financial flexibility the structure of the Cowen agreement provides lower borrowing costs and allows us to retain a greater interest in our future LFRP revenues.

We have also completed partnerships with sanofi-aventis and Cubist, which have helped to future reduce our development risks and expenses.

These transactions represent our ongoing efforts to strengthen Dyax’s balance sheet and give us the flexibility to pursue our research, development, and commercialization goals. With these deals in place, our net cash consumption for the year would be less than $20 million significantly lower than 2007. And at this time we have sufficient cash reserves to fund operations well into 2009. We also anticipate additional reductions to our burn through new partnerships and collaborations.

And now I will turn the call back to Henry.

Henry Blair

Thank you, George. In our review, I like to begin with a focus on our DX-88 commercialization strategy. This four part strategy includes; first, Dyax’s US commercialization of DX-88 in HAE, second the finalization of a European partnership for DX-88 in angioedemas, third DX-88’s development and commercialization in surgical indications through our partnership with Cubist Pharmaceuticals, and finally the development of DX-88 in additional angioedemas, including nonhereditary angioedemas.

With respect to the HAE program, during the quarter we had 2 significant milestones towards accomplishing our US commercialization strategy. First, the announcement of positive results from our second Phase III trial EDEMA4, and second the submission of the biologics license application to the FDA on September 23, which included a request for priority review.

As reported in our press release and conference call in August, the top line data from the placebo controlled trial EDEMA4, confirmed DX-88’s prior clinical experience including a positive and significant results from our first Phase III trial. EDEMA4 data shows statistically significant clinically meaningful improvements in primary and secondary endpoints and good tolerability with no treatment related serious adverse events. The trial made up of the final sequence of a robust PLA clinical package intended to meet the highest regulatory standards which is of critical importance in today’s current regulatory environment. This data set included the largest placebo controlled evaluation of any therapy used in the treatment of HAE as well as comprehensive and validated endpoints included under a special protocol assessment.

HAE is a painful and debilitating disease which in some cases can be a life threatening. Attacks are unpredictable and can often occur at several locations throughout the body. We believe our data accurately captures the progression of multi-symptom HAE attack and is therefore relevant and meaningful to both the patients and their physicians. And as a recombinant subcutaneously administered therapy with no risk of viral contamination, our market research suggests that DX-88’s profile matches well with HAE patient’s desire for treatment.

These patients currently have very few treatment options. The FDA only recently approved the first prophylactic treatment for HAE, which with its twice weekly intravenous infusion and roughly 50% efficacy may only address the needs of a small percentage of the patient population. There is no US treatment for acute attacks, which is the object of our HAE clinical development program.

We continue to believe that DX-88’s clinical profile and characteristics including subcutaneous administration support the compound as a potentially significant new therapeutic option for the majority of patients suffering from these attacks. The advantages of DX-88 make it an important therapeutic alternative also for patients in Europe and other regions of the world.

As we reported at the end of the quarter, while the exclusive negotiation period with Dompe for European partnership in DX-88 and angioedemas ended on September 30. The discussions are ongoing.

With respect to DX-88 in other angioedemas, we are pleased to announce the institutional review board approval was recently received for compassionate use of DX-88 in a study of patients with acquired angioedema. Acquired angioedema is most frequently associated with B-cell lymphoma and autoimmune disorders. This 9-patient study will be conducted by a key opinion leader in the angioedema field Dr. Marco Cicardi and will involved 3 sites in Italy. Eligible patients will have prior diagnosis of acquired angioedema and will be treated with 30 milligrams of subcutaneous DX-88.

Response rates will be compared to the historical experience with angioedema attacks. Some patients with acquired angioedema exhibit increased consumption of antibodies to C1INH rendering treatment with this agent either ineffective or problematic. In addition to acquired angioedema we are also preparing to initiate an investigator sponsored study in drug induced angioedema using DX-88 in an emergency room setting. This study will be lead by Dr. Moorman [ph] and Bernstein [ph] from the University of Cincinnati.

Both doctors have extensive experience using DX-88 for the treatment of HAE. We look forward to providing more details as these studies progress.

During the quarter, Cubist made significant progress with DX-88 in on-pump cardiothoracic surgery. They recently announced the preliminary top line results from the Kalahari 1 trial. Based on these results they outlined the focused development strategy of next steps for DX-88 in CTS. These include a Phase II dose- ranging trial in primary CABG patients and a second parallel Phase II trial in a surgical population with high risk of bleeding .The dose-ranging trial is expected to be launched by year end followed shortly thereafter by the high-risk patient study. The data from these trials will determine the design of the pivotal Phase III study.

In addition to DX-88, our Licensing and Funded Research Program is expanding and maturing. The growing importance and value of our LFRP was again highlighted during the quarter. As one of the last remaining independent licensors of antibody discovery technology we are in a unique position to leverage phage display into higher value deals. This is reflected by the addition of two licensees, first with AVEO Pharmaceuticals, which included a unique structure not present in past transactions, and second our co-development agreement with Athera Biotechnologies.

During the quarter, the LFRP reported the first product launch from a licensee, (inaudible). In total the LFRP has over 70 licensees and collaborators and a valuable maturing pipeline with 13 product candidates in clinical stage development.

As product candidates from the LFRP move into commercialization, Dyax has the potential to earn significant milestones in royalties.

We are seeing some of the early returns of the LFE from both growing revenues with over $10 million through September 30 this year and from our ability to use the program for strategic financial transactions. Looking ahead, we are focused on accomplishing the next steps in our DX-88 global strategy. We also continue to leverage our phage display technology to broaden LFRP and to expand our own pipeline of innovative product candidates. This transformational period for DYAX with multiple growth opportunities and most importantly the potential to commercialize our first product.

Gustav’s experience and leadership qualities will add significantly in this important period for Dyax. During his comparatively short tenure at Dyax, he has already made a tremendous impact. And I’m confident that he will successfully guide us through the transformation of Dyax into a fully integrated biopharmaceutical company.

I will now turn the line back over to the operator to begin the Q&A portion of the call.

Question-and-Answer Session

Operator

(Operator instructions) And your first question comes from the line of Mark Monane of Needham, you may proceed.

Mark Monane – Needham

Hi good morning and thank you for taking my question. Let me start by wishing Henry and Gustav best wishes in their new roles and a smooth transition period. Question on the sales force development, can you comment on what – how big the sales force might be and what kind of expenses might be associated with the building of such a sales force?

Henry Blair

I am going to turn that over to Gustav to answer.

Gustav Christensen

What we have at this time consistent with what we have said in prior calls just built a small marketing group as we have gotten successful phase III data in. It consists of a VP of marketing and a small group of people that are focused on reimbursement, physician and patient marketing and service and also analytics. We will not proceed to build a sales force until we have full confidence of approval of the product. So it is a bit early to forecast what the costs will be because the timing ultimately of course, is dictated by the FDA.

Mark Monane – Needham

But you have a – have you sized the market at this point, are you able to comment how many – is it a 10 person sales force or 20% sales force, what – do you have any size of the market and thought about those concerns?

Gustav Christensen

We’re actually in the last stages of sizing that sales force but rather than telling you the exact number, it is probably safe to assume it will be somewhere, the actual sales force will be somewhere between 10 and 20 people.

Mark Monane – Needham

Can you spend some time speaking, discussing with us please the rational of using the DX-88 in other conditions other than HAE. We saw the Kalahari data but how about angioedema in other non drug – non-hereditary conditions, can you talk the science bond there and the (inaudible)?

Henry Blair

Yes, I will turn that question over to Bill to answer it.

Bill Pullman

Yes, certainly, perhaps in brief because I think the science here has a number of complexities, but suffice to say the contact inhibition pathway and the centrality of kallikrein driving both bradykinen mechanisms primary which result in the edema and vascular shift so that where you have the surgical indications, but the role of the kallikrein bradykinen pathway has been very well established no just in HAE but also in other conditions such as acquired angioedema, which is due to the acquired as opposed to inherited deficiency of C1 inhibitor and so that is a very natural place to go. With respect to, for example, drug-induced angioedema, likewise the role of kallikrein bradykinen pathway appears to have merged as the primary mechanism and it makes a lot of sense to follow that. So, we are very much taking a common mechanism approach. I think, other areas that we are still under active discussion and seeking input from experts in the field include that broad area of idiopathic angioedemas and here I am not talking about the allergic (inaudible) histamine of phenomenon but the ones that relate to a kallikrein pathway. Likewise, there are many medical conditions that have an edematous component that is triggered by the contact pathway and kallikrein and we will explore those as well. So, there is a broad field of common mechanism approaches that the science increasingly supports the attractiveness of.

Mark Monane – Needham

And then could you also comment on the status of the 2240, 2400, and 2300 drugs in the pipeline? We didn’t hear about that on this call.

Bill Pullman

Details of the – the technical aspect of it Mark or –

Mark Monane – Needham

I am sorry, I apologize. Can you talk about the development status of 2240 with sanofi, 2400 MMP-14 inhibitor and I guess next generation DX-88 that 2300 molecule?

Bill Pullman

We can, but it may take quite a while to go into that Mark. I am not sure that is sure subject of this call. But as you know, 2240 is being developed by sanofi-aventis, 2400 is in preclinical development as is 2300. At some point in a later time I think we could spend a little bit of more time on this and really go into few more details but I’m afraid today we probably don’t have time for that.

Mark Monane – Needham

I will step back into the queue and allow my colleagues to go. Thank you again for the added information.

Bill Pullman

Thanks very much Mark.

Operator

And your next question comes from the line of Katherine Xu of Credit Suisse. You may proceed.

Katherine Xu – Credit Suisse

Thank you. Just curious with regard to your strategy to pursue other angioedema indications. It looks like you are doing some investigator-sponsored study. Does it mean that you are pursuing a strategy that is probably to target these indications for sort of off labels strategy or do you want to eventually still as you guided before pursue large scale studies to get these indications on the label?

Henry Blair

I will turn that over to Bill to answer. Please.

Bill Pullman

Thanks Henry. Thanks Katherine. I say in no way are we pursuing or advocating off label use. I think what the strategy was driven at is generating scientific data in some very possible fields and we will make discussions as to a subsequent development from there.

Katherine Xu – Credit Suisse

Okay, my next question is, could you give us some color on the EU licensing deal, the status of that negotiation?

Henry Blair

Turn that over to Gustav to (inaudible).

Gustav Christensen

Sure. The exclusivity period with Dompe, as you know, ended September 30 and we are still discussing with them at full speed actually to translate a 12 page letter of intent in a 135 page licensing document. You always find that the devil is in the details, where economic interests are what it is about. And so this is where the discussions are focused. We don’t really have many issues left but there are important issues to both us and to Dompe. As the – as exclusivity ran out, we are obviously being contacted by other companies and we do have conversations going on in parallel with other firms and we will do this with the Dyax shareholders interest at heart, and end up with the right for DX-88 be it with Dompe or be it with someone else.

Katherine Xu – Credit Suisse

Could you give us a time line on that?

Gustav Christensen

I really rather not predict the exact time for the signing as you might remember in 2007 I told you we would have Sanofi done 2240 by year end. It ended up being early February when we signed it. Cubist the same thing, took a few extra months. If you start making too many predications the negotiations ended up being a little one sided and you have to do the right deal. You shouldn’t sign until you have the right deal.

Katherine Xu – Credit Suisse

Thank you.

Operator

And your next question comes from the line of Phil Nadeau of Cowen. You may proceed.

Phil Nadeau – Cowen

Good morning. Thanks for taking my questions. The first is on the DX-88 filing, are you expecting an FDA advisory committee review or is it possible to get approval without a panel meeting?

Henry Blair

Again I will turn that over to Bill to answer.

Bill Pullman

We are planning for an advisory committee meeting because simply the predominant legislation mandates that they have one for novel therapeutic products. Obviously there are situations when they can revisit and revise that but I would anticipate that we would have one and I think that is maybe all I can add at the present time. Clearly the next step is to hear that the (inaudible) has been accepted for filing, what the review status it. As Henry indicated we have requested priority review status and they will take it from there as the review and approval goes forward.

Phil Nadeau – Cowen

And what advisory committee would you expect would review your application, would it the same one that reviewed Lev, or is there any reason you think it could be a different advisory committee?

Bill Pullman

No, every division has their advisory committee. So for Lev it was the BPAC, Blood Products, for this division which is pulmonary analogy they have an advisory committee that have standing members that are special government employees and so they draw on those folks and additionally other experts depending on their need. So it is a different advisory panel makeup but the same rules in engagement.

Phil Nadeau – Cowen

Okay great and then one question on your European filing strategy, could you update us on exactly what is the European filing strategy. Do you expect that your current studies will be sufficient to file or do you in your Dompe agreement anticipate having to do additional clinical trials?

Bill Pullman

I don’t anticipate having to do additional clinical trials I think for an open indication we are providing a very robust efficacy data set and safety data set. We’re in the process of following the filing requirements with the EMEA, and as part of that there’ll be directs scientific consultations with the EMEA, but also importantly the (inaudible) so that if additional information is required we will be able to do that on a real time basis, but I would fully anticipate that the strength of the package as we have submitted will suffice for European discussions?

Henry Blair

This is not an issue with the Dompe agreement by the way just to set matters straight.

Phil Nadeau – Cowen

Okay, and when can you be approved in Europe?

Bill Pullman

Well again that will depend on the acceptance of the file. The determination that they do have not quiet analogous situation here with an expedited and somewhat longer term, whether it is a nine month or a twelve month review cycle. So all of that will become clear once we have formally submitted the dossier.

Phil Nadeau – Cowen

Okay and when do you expect to formally submit?

Bill Pullman

We are looking for the early part of next year.

Phil Nadeau – Cowen

Okay, perfect. Thank you.

Operator

(Operator instructions) And your next question comes from the line of Jason Kolbert. You may proceed.

Jason Kolbert

Hi, guys and by the way thanks for all your support Henry. I really have appreciated it throughout the years and I know this is really a – the evolution of a long-term strategy that has been in place for a while. A couple of questions, the HEA market is really changing a lot now with the recent approval of Cinryze and (inaudible) in Europe. So, you could take a few minutes and just go through what you think the market size is going to look like in the US over the next year as it develops and what the real positioning is going to be of DX-88 as an acute strategy given the fact the Cinryze is going to out there as a prophylactic strategy in the US?

Henry Blair

You know, I will turn to Gustav to answer.

Gustav Christensen

Sure. Jason. I believe that the economics and the efficacy of the products will over the next period of time that will be both prophylactic and acute treatments available will to some degree dictate where the line between prophylactic and acute will actually be drawn. So right now for a period of time there will only be a prophylactic treatment available. To me that would probably mean for a period of time there may be patients going on that treatment that when the acute comes out it will be hard for the players to justify. So if the economics and the efficacy of the two products will eventually dictate where the line is actually drawn and to some degree what the patient is meaning that some patients really like control of their lives, meaning they want to only want to treat themselves with a potent drug when they have an attack and avoid multiple injections that they may or may not need. As you know, the prophylactic requires you go and have two injections infusions per week whether or not you have an attack or not. And they have the largest amount, 47% breakthrough attacks. So it is not the ideal product at this time.

Jason Kolbert

Okay, that boy it is really going to be interesting. So, it sounds a lot like Cinryze will be out there kind of breaking ground, identifying patients, but in many ways maybe setting the market, setting it up for the acute phase in the US.

Gustav Christensen

I think that is a very astute observation.

Jason Kolbert

Thank you and so in Europe, can we just talk a little bit what the idea that C1INH inhibitor has been available in the continent for a while and now we know that (inaudible) is out on the marketplace, what would the positioning strategy be that you envision for DX-88 on that continent?

Gustav Christensen

Both will be different in that they have used C1 inhibitor product mainly as an acute act, very few patients are on true prophylactic treatment. They have a lot of home infusion for acute treatments on the European side. We do believe and so does the people that we actively talk to that the unique characteristics of DX-88 boasts in terms of the subcu, as well as the risk benefit award that offers vis-à-vis the (inaudible) product will allow for the acute market to be split between us and (inaudible) and probably to a lesser extent C1 inhibitor.

Jason Kolbert

Okay, terrific. Thanks so much and Gustav congratulations on the position.

Gustav Christensen

Thank you very much Jason.

Operator

(Operator instructions) I am showing that you have no further questions at this time. I would now like to turn the presentation back over to Mr. Henry Blair for closing remarks.

Henry Blair

I thank you all very much for joining us and we look forward to keeping you informed as we progress. Thank you.

Operator

Thank you for your participation in today’s conference. This concludes the presentation. You may now disconnect. Good day.

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