ARYx Therapeutics, Inc. Q3 2008 Earnings Call Transcript

ARYx Therapeutics, Inc. (ARYX)

Q3 2008 Earnings Call Transcript

November 12, 2008, 11:00 am ET

Executives

David Nagler – VP, Corporate Affairs

Paul Goddard – Chairman and CEO

John Varian – COO and CFO

Analysts

Adam Walsh – Jefferies & Co

Bret Holley – Oppenheimer

Bill Tanner – Leerink Swann

Steven Harr – Morgan Stanley

Dominique Semon – Merlin Nexus

Joe Aguilera – BioRevolution Capital

Presentation

Operator

Good day ladies and gentlemen and welcome to the ARYx Therapeutics third quarter conference call. Just a reminder, today’s call is being recorded. At this time for opening remarks and introduction, I am happy to turn the call over to Mr. David Nagler, Vice President of Corporate Affairs. Mr. Nagler, please go ahead.

David Nagler

Thank you very much. Good morning and welcome to the ARYx 2008 third quarter conference call. On today’s call Dr Paul Goddard, ARYx’s Chief Executive Officer and Chairman will provide an update on our products in clinical development and John Varian, our Chief Operating Officer and Chief Financial Officer will review our financial results for the quarter. Following the prepared remarks, we will open the call for your questions.

Before we begin though, I need to read a formal statement regarding the risk factors in these presentations and the discussions that will follow. During the course of this conference call, we will discuss projections and make forward-looking statements regarding future events or the future financial performance of ARYx. These statements are only predictions and the actual events or results may differ significantly. Please refer to the documents that the company files from time to time with the SEC specifically, the company’s most recent Form 10-K and Form 10-Q both of which are available on our Web site at www.aryx.com. These documents contain and identify important factors that could cause the actual results to differ from those contained in the projections and forward-looking statements. The projections and forward-looking statements discussed during this conference call are based upon the information we currently have available, this information will likely change over time. By discussing our current perception of our market and the future performance of ARYx and its products with you today, we are not undertaking any obligation to provide future updates and the actual results may differ substantially from those discussed today and no one should assume that at a later date our comments from today are still valid.

Now, I would like to turn the call over to Dr. Paul Goddard.

Paul Goddard

Thank you David and thank you for joining us today for our third quarter conference call. During the quarter we continued to make significant progress towards our clinical, strategic and importantly financial goals. I am pleased to report that as a result of this progress ARYx is well positioned to achieve both our corporate and product related milestones. I would like to provide you with an overview of recent events.

Before we begin the discussions of our quarterly results, I would like to highlight that ARYx has recently entered into definitive agreement to raise $21.6 million in a private placement of approximately 9.6 million shares of common stock. To a group of top-tier investors, we have won new funds joining several existing investors. Coming as it does during this time of uncertainty in the equity markets, we believe that this financing represents a very clear vote of confidence in the company’s future and the prospects for its products. The proceeds from this financing will strengthen the ARYx balance sheet and provide us the necessary capital to execute on both our short and medium term planned clinical programs.

While we understand that the financing of the stock price is pretty painful, we believe it was the right thing to do since it should allow us to achieve several key milestones. Importantly these proceeds along with existing cash will allow significant financial and operational flexibility as we continue to pursue potential partnerships for our three compounds in development. The added capital will enhance our strategic negotiating position ensuring that we gain maximum value from each of our products. In short, we will now be able to do the right deals with the right partners at the right time and under the right terms for ARYx. Additionally with two Phase 3 ready [ph] compounds and one compound already in Phase 3 testing, the inherent value of these programs in aggregate is substantial.

We believe these products are at the stage of development where we can negotiate terms that when combined with the cash that we now have on hand could alleviate our need to seek additional funding from the public markets for the foreseeable future. This type of financial independence should we be able to achieve through partnering our programs will be particularly valuable regardless of the condition of the financial markets. While we can’t guarantee when we will reach an acceptable partnership for any of our products, interest is high due to the amount of clinical activity currently ongoing especially with ATI-5923, our oral anticoagulant agent and ATI-2042, our oral anti-arrhythmic agent.

Turning now to ATI-5923, last week we announced that we have completed enrollment in our Phase 2/3 trial comparing our novel anticoagulant agent against the leading anticoagulant agent Warfarin. The purpose of the study is to evaluate whether ATI-5923 is superior to Warfarin in its ability to maintain patients within the target therapeutic range. In this study we compare the level of anticoagulation of the two products. This is measured by a standard finger prick test and is known as the International Normalized Ratio or INR. Based on our discussions and correspondence with the Food and Drug Administration, we believe that INR should be an acceptable surrogate and a provable primary endpoint for pivotal studies for ATI-5923.

Also based on recent interactions with the regulatory authorities, ARYx believes that the Phase 2/3 trial could be positioned as one of the pivotal studies needed for registration. Approximately 600 patients have been enrolled in this Phase 2/3 study at 48 clinical study sites in the United States. Each patient will be treated for a minimum of six months and each required anticoagulation therapy to avoid serious blood clotting resulting from the underlying conditions. This study includes patients with atrial fibrillation, implanted prosthetic heart valves, a history of venous thromboembolsm, a history of myocardial infarction or cardiomyopathy or for that matter any other indication for which they should receive chronic anticoagulation therapy.

The primary end point of the trial is to demonstrate that patients are maintained within the target INR range a high proportion of the time when treated with 5923 compared to Warfarin. In a study previously published by a group in the UK, it was determined that the risk of mortality, ischemic stroke, and thromboembolic events increases reduced time in therapeutic INR range after adjustment for age, sex and baseline morbidity. For example, a 10% decrease in timing therapeutic INR range was associated with a 29% increase in mortality.

With the Phase 2/3 trial fully enrolled, we are now confident that we will be able to report the data from this trial by the end of the first half of 2009 as we have previously forecast. Of course this rapid enrollment would not have been possible without the commitment of the investigators at each of our clinical trial sites and the dedication of our own development team. I would like to take this opportunity once again to thank them for their hard work and dedication to this program. The study methodologies being used in the Phase 2/3 trial were tested in a pilot study of 50 patients completed earlier this year.

In that study we use an independent automated dose control center that provided extremely prompt feedback to the enrolling sites. In most cases, the patients had their INR taken, the information fed to the independent physician and the feedback on dose changes, if needed, usually occurred inside 10 minutes and in most cases in 2 minutes. Additionally, although the pilot study was not designed to test the efficacy of ATI-5923, we found patients were maintained within the target therapeutic INR range just under 74% of the time which was virtually identical to the results from our earlier Phase 2 study in 66 patients. It is interesting to note that at the time Warfarin patients entered into this pilot study they were on average within target therapeutic range only 49% of the time.

We have so far seen that the longer a patient is treated with ATI-5923 their time in therapeutic range steadily improves. In fact in CLN-504, the first Phase 2 study we conducted, at the end of three months of treatment just over 80% of patients were in therapeutic range and moreover were on a stable dose. The successful completion of this pilot study along with the efficacious results we saw gave us continued confidence in the potential for 5923 to be superior to Warfarin and our ability to demonstrate that superiority in the current ongoing blinded study. Just as a reminder, ATI-5923 is modeled on Warfarin, both 5923 and Warfarin are vitamin K epoxide reductase (inaudible) inhibitors.

However unlike Warfarin, our drug avoids reliance on the cytochrome P450 pathway for clearance a distinction that may help our agent avoid the drug-drug interactions common to Warfarin or producing more stable anticoagulation. This should result in patients being more better able to maintain their level of anticoagulation within target therapeutic range and should in turn improve morbidity and mortality.

Turning now to the other product in our cardiovascular franchise ATI-2042, we continue to make significant progress in the development of this novel oral anti-arrhythmic agent, Earlier in the third quarter we completed enrollment in a Phase 2 trial studying ATI-2042 for the treatment of patients with atrial fibrillation. The treatment phase is ongoing but we are now confident that we will be able to report topline data from that trial by the end of the year as previously forecast. Timing of the data availability from this trial is important because we are in active discussions with companies interested in partnering ATI-2042. As I mentioned earlier, the recently completed financing has enhanced our balance sheet and our ability to select the best partners to bring our products forward through to commercialization.

As a reminder, 2042 was designed to have efficacy comparable to Amiodarone. While it is recognized to be the most efficacious drug for the treatment of atrial fibrillation Amiodarone has an adverse side effect profile thought to be caused by drug accumulation in various organs and compounded by its reliance on cytochrome P450 pathway? By contrast ATI-2042 is predominantly metabolized by the esterase pathway which allows the drug to have a biological (inaudible) a distinction that should enable it to avoid negative side effects associated with the older drugs while retaining the efficacy of Amiodarone.

Finally, before I wrap up this part of the discussion I would like to mention that we are about to submit the final study results of our Thorough QT study for our oral prokinetic agent, ATI-7505 to the Food and Drug Administration. As previously stated, we intend to use these results along with existing positive pre-clinical data to partner this program in the future. So in summary, we have made great progress on our product development programs as well as our corporate goals. I would like to sum that with six points.

First, the recently announced private placement we strengthened our balance sheet and bolstered our negotiating position with potential partners. Second, the two cardiovascular drugs ATI-5923 and 2042 remain our primary clinical focus. Third, we continue to meet clinical milestones in both of those programs, we will have key data related to each of the products in the near term. Four, we are in active discussions with potential partners for ATI-5923 and 2042 and are dedicated to select the most favorable agreements in a timely manner. Fifth, we intend to prepare ATI-7505 for licensing once we have a reaction from the regulative authorities on the therapeutic study. Finally, we believe that recent financing along with the revenues from partnerships may provide ARYx with a level of financial flexibility that will alleviate the need to seek additional financing from the public markets for the foreseeable future.

With that I would like to turn it over to John Varian to provide an insight into our financial results. John?

John Varian

Thanks a lot Paul. As Paul mentioned this morning, we announced that ARYx has entered into a definitive agreement to raise $21.6 million in a private placement of approximately 9.6 million shares of common stock to a group of top-tier investors including NEA as well as several of our large existing investors. We are very pleased to have completed this financing under these challenging market conditions. We were gratified by the strong support from both existing and new investors whose participation demonstrates the confidence in ARYx potential products and our corporate strategy.

By undertaking this financing now, we are better positioned both strategically and financially to negotiate partnership for each of our product candidates. As Paul said, this private placement gives us the financial freedom to flex not just partnerships but the right partnerships and the freedom to ensure we do them at the right time under the best terms for ARYx.

As we discussed previously we are actively pursuing the possibility of doing a deal for ATI-5923 our oral anticoagulant ahead of trials results which will be available by June 2009. We have been talking with several companies regarding this and may achieve deal terms which we consider to be acceptable. Importantly this financing allows us to say no to deal terms which do not adequately reflect the value of ATI-5923. In this case, we would revert to our original plan and we would wait for the data from the ongoing 600 patient study and then license the products.

We will make a decision of whether to do a pre-dated deal or not over the next several months. It is our most valuable asset and we want it in the right hands and the right terms for ARYx. The terms of these potential agreements is of added importance when you consider that the financial payments to ARYx from these partnerships when combined with our existing cash and the proceeds from the private placement may result in the company reaching a new level of financial independence. Certainly that would be a welcome situation since it would mean we wouldn’t need to return to the equity markets until it was at our choosing.

Now I would like to review our financial results for the third quarter. We had net income in the third quarter of 2008 of $3.2 million or $0.17 per fully diluted share compared to a net loss of $7.3 million in the same quarter of 2007. The reason for our reported profit in the third quarter is due to our recognition of revenue resulting from Procter & Gamble’s third quarter decision to terminate the collaboration agreement related to our oral prokinetic agent, ATI-7505.

Research and development expenses for the third quarter were $11.8 million compared to $6.6 million in the same period last year. The increase in expense is primarily due to additional cost associated with the ongoing Phase 2/3 clinical trial for ATI-5923 and the ongoing Phase 2 clinical study of ATI-2042. We are in a very high spend phase in these important trials at the current time. Our general and administrative expenses for the third quarter of 2008 were $2.4 million. In the third quarter of 2007, G&A expenses totaled approximately $1.9 million. This increase is primarily due to the higher personnel and other related expenses associated with our need to function as a public company including compliance with the requirements of Sarbanes-Oxley. This amount also includes approximately $400,000 of non-cash stock compensation expense.

Revenues for the third quarter of 2008 were $17.5 million compared to $1 million in the same period last year. These revenues were earned under our former agreement Procter & Gamble for the development of our oral prokinetic agent ATI-7505 and as I mentioned earlier, this one-time dramatic increase in revenue was a result of the remaining $17.5 million from the original $25 million upfront non-refundable payment now being fully earned. As of September 30, 2008 we had cash, cash equivalents and short-term investments totaling approximately $33.8 million.

When the private placement closes, we will have an additional approximately $21 million which we believe will be sufficient even before factoring in proceeds of a potential corporate partnership the fund operations through the first quarter of 2010 and this is without completing any deals for ATI-2042, ATI-5923 or ATI-7505. Our plans are to partner each of these programs in the next 12 to 18 months. The data from the CLN-205 study of 2042 which will be available at this year end is what we believe will be our partnerable data. We will work to complete a partnership as quickly as possible with these data. If we don’t do a pre-dated deal on ATI-5923 we believe the data available at mid-year 2009 should lead to a partnership for this program.

While partnering ATI-7505 has not been our priority to date, when one of these other products is in partners’ hands, we will shift our partnering efforts to ATI-7505. As we said before, we will use the Thorough QT study results and the FDA reaction to those results coupled with the excellent Phase 3 enabling chronic constipation results to try to attract a new partner for ATI-7505.

As I mentioned during our last quarterly conference call this year, we performed a review of expenses and began a consorted effort to control our anticipated spending, carefully managing our cash burn, and eliminating non-essential expenditures. Specifically we identified reductions in our planned spend to focus our efforts more closely on specific near-term corporate milestones and deliverables to ensure our cash resources are sufficient to fund operations.

While the private placement will strengthen our balance sheet, we will continue to pursue efficiencies in our operations ensuring that we will have the cash and time to meet our stated clinical and business development goals. Corporate partnerships will likely result in even greater financial flexibility and we are in active discussions to partner our products. We believe the achievement of clinical milestones, the presentation of data will bring us closer to being able to partner our products and we look forward to updating you when deals are signed.

So in summary, we are financially and strategically strong with enough cash to last for the time in which we expect to complete partnerships in an optimal manner. We will continue to be focused on advancing our products while maintaining financial discipline and our clinical progress and healthy balance sheet gives us increased leverage as we consider potential partners for our products.

I will now turn the call back over to Paul.

Paul Goddard

Thanks John. Just before we turn over to the Q&A session, I want to reiterate just how important the financing is to our company. We wanted to relieve any doubt that we have the cash in place to get the best value for each of our products. We accept that a weak cash position with legitimate concern we should move quickly to overcome. What we cannot accept is that Big Pharma has the upper hand in partnership discussions. Oral products for large chronic markets are broadly desired and needed by most if not all of the pharmaceutical companies. They are aware that for each of our products a competitive situation does exist or will exist given the potential value for each of them. We will have the ability to select the right partner who we can expect to do a great job with each of our products on fair terms to ARYx. That competitive dynamic is still in place and now we have the balance sheet to allow that dynamic to play itself out.

With that operator, I would like to turn it over to questions.

Question-and-Answer Session

Operator

Thank you Dr. Goddard. Ladies and gentlemen, our question and answer session is conducted electronically (Operator instructions) We will go first today to Adam Walsh of Jefferies & Co.

Adam Walsh – Jefferies & Co

Hi Paul and John, thanks for taking my question. How are you?

Paul Goddard

Good morning I am doing fine. Hi Adam.

Adam Walsh – Jefferies & Co

So I have got a few, I guess the first one here is Paul you mentioned you don’t want Big Pharma to have the upper hand in their discussions but I am curious as to why now that you have financing deal in place, why you would continue to consider a pre-dated deal for 5923 since it seems as though with the cash on hand you might be able to generate the data by mid next year and be in a better position to negotiate with Pharma.

Paul Goddard

Adam that is a good question and if you recall what we said on our previous quarterly update that we were in active discussions to establish whether or not we could complete a deal on 5923 by the end of the year and that process basically is playing itself out at the moment. And I think the point to be made both to people listening on this call and also to potential partners is really to John’s point which is we are not going to accept any terms where we would not consider it to be appropriate to the value of the product and that really assumes a positive outcome of the ongoing Phase 3 study. So, we are willing to back away very quickly now from any half-baked set of terms for this product.

John Varian

With that said, there is one other thing, one of the reasons we thought about this seriously is having a partner in place sooner can accelerate the time to market for the product. So that is somewhat of an offsetting factor and one of the reasons that we continue to consider doing a pre-dated deal but again importantly, you hit the nail on the head, by doing this financing we have the choice of either doing a pre-dated deal or waiting for the data and trying to capture the value that way.

Adam Walsh – Jefferies & Co

Great. My second one here is also on 5923, you mentioned in your release here that based on recent interactions with the FDA you believe that this Phase 2/3 could be positioned as a pivotal, and I guess my question there is the FDA has been obviously an extremely tough customer here as development stage companies try to bring drugs forward, my question on that is can you elaborate a little bit on these interactions and how confident you feel that the interactions we are having today are actually indicative of what the FDA’s ultimate position might be on the status of this trial?

Paul Goddard

Adam, that is another good question and we are all aware that the regulatory authorities whether they be in the US or other parts of the world always reserve the right to change their mind as they look at data as it becomes available not only from your own product but from others as well. The only thing I can say about our interactions with the Food and Drug Administration on ATI-5923 is from the very day that we started talking to them about INR as the potential surrogate end point, they have been consistent in their response to us in terms of how they see the program for 5923 unfolding and how they see this program vis-a-vis Warfarin specifically. The more recent discussions which related to how we got to a Phase 3 study being conducted related really to their guidance to us to take what was originally a Phase 2 protocol and guided us towards making it a pivotal study. So we took their advice in large part which was unsolicited by the way and so we believe we have a pivotal study in place, however as ever with say FDA, they will (inaudible) on those data when they see them as presented either in the development process or at the time of an NDA filing.

Adam Walsh – Jefferies & Co

Okay that’s helpful. Thanks. I will jump back in the queue. Thank you.

Paul Goddard

Thank you Adam.

Operator

We will go next to Bret Holley with Oppenheimer.

Bret Holley – Oppenheimer

Hi, thanks for taking my question. I had a question about 7505, I am just wondering what form the (inaudible) might take and what are you expecting from them, are you expecting a thumbs up or just inputs on the quality or the lack of quality of the data, I am just wondering what you are expecting back from them.

Paul Goddard

So, Bret good morning. This obviously is going to be another one of those interactions where we don’t know what the outcome will be. Again it is typical interaction time with the FDA in the 2008, 2009 timeframe. However this study was done in a way which was on the guidance of (inaudible) so we consider it to be a therapeutic study that is valid and so we can often do they believe it is valid but more importantly as we move into Phase 3 and we believe those constipation data that were produced are Phase 3 enabling but as we move into Phase 3, what if any specific monitoring would be required in those studies. That really is the best we could expect and quite frankly is a practical consideration for us as we move forward to license the product and put together with a potential partner a Phase 3 protocol. So, therefore no special monitoring means is that they feel that the outcome from that study is appropriate.

Bret Holley – Oppenheimer

Okay. Another question I had is, is the capital raise I understand obviously gives you average in the near term but the question I have is that if you should decide to wait to do a partnership until mid year of next year, you are in a position where maybe you would have cash or so, does it truly give you leverage to really wait that long or do you think that you might have to raise additional funds if you decide until the data is final?

Paul Goddard

Very good question Bret. So, the way this will play out is it is not that we have the cash and we would do three deals at the very end of the period of time when we have the cash. What we expect to have happened is a sequencing of deals and again the partnerable data that we will generate for 2042 is the year-end data which will then follow with hopefully a partnership based on those data. The mid-year data as we were just talking about, the June data that we will have on 5923 would then enable us sequentially to do a deal on 5923. Whether 7505 fits within that sequencing, we can’t really tell right now because we are not as active on the partnership discussions for that program yet but it won’t be such that we have the cash and we have to do all the deals at the very end, we will be sequentially doing deals bolstering our cash balance as we go as to what we think is having 18 months worth of runway from today with the cash that we have in the bank bless us in a very thoughtful sequential way to do the right deal for each program one by one.

Bret Holley – Oppenheimer

Okay, thanks a lot guys.

Paul Goddard

Thanks Bret.

Operator

We will go now to Bill Tanner with Leerink Swann.

Bill Tanner – Leerink Swann

Thanks for taking the question. Paul just on the 5923, on the end point I am curious as you have been talking about potential partners, what is the level of their comfort about what is being communicated by the FDA and then I don’t know if it can even be done whether or not you could get – so if this one Phase 2/3 trial is successful and it could count as a pivotal, is there a way to do an SPA sort of in the middle before you do the second trial to really nail down the end point or something that is approvable by the agency?

Paul Goddard

Thank you Bill. That is a whole multiple series of questions there. Let me start with answering the last question first because I think that is the most straightforward. The guidance that we have received and we have previously indicated is that they would like, the regulatory authorities would like to see two different studies, one is a head to head versus forefront in a double-blind double-dummy situation which we have ongoing at the moment we talked about today.

The second is a real world study where patients are randomized to 5923 or Warfarin and then treated in an open label fashion with the objective of keeping those patients in therapeutic range for the highest possible percentage of time using everything available to the physician in terms of dietary advice, monitoring frequency, etc, etc. So, to your point that we would hope that a partner or maybe even we would get a special protocol assessment for that study so that as it gets initiated we already have in place the agreement to be able to confirm that this is a pivotal study. And by inference I assume – I don’t know, but assume that the current ongoing study matches the second one in an appropriate manner. So that I think is the overall strategy. So, whether we partner (inaudible), it is incumbent upon us or upon us to get an SPA in place. To the point about INR as being appropriate surrogate endpoint and [ph] the January action from potential partners, and probably more importantly, physicians because potential partners talked to physicians about their view about this.

As you know, the literature is replete with a lot of papers that link time in therapeutic range to morbidity and mortality. And if you look carefully at the prescribing information for Warfarin, basically that’s the therapeutic endpoint, it’s INR. So the feedback we have got from our primary market research, the feedback we have got from potential partners is that they find INR is a very creative way to get to an endpoint, which could be acceptable to the medical profession at least and hopefully to the regulatory authorities, and they link back to morbidity and mortality. However, having said, I would suspect again that in the longer term in the Phase IV situation that some kind of outcome study would be eventually done.

Bill Tanner – Leerink Swann

Right, right. Okay. Sounds logical. And just in terms of the types of partners, would it be logical to think that it would probably not be with someone who is developing a direct thrombin inhibitor, HNA [ph] inhibitor, or not necessarily?

Paul Goddard

That wouldn’t be a completely fair assumption.

Bill Tanner – Leerink Swann

Would not be.

Paul Goddard

Yes. What has happened is, the companies are in fact developing those products that looked at them as one size fits all a year or two ago realized it’s not one size fits all. And that their patient segment is going to be limited. Some are thinking severely limited, some are partially limited. And so the level of interest from those companies exists also.

Bill Tanner – Leerink Swann

And John, limited to the sense that – I mean, limited by inability to monitor or limited by not having an antidote, or all sort of –?

John Varian

There are several things. Both our primary market research and then – apparently their primary market research is showing the same thing. There is a significant segment of patients where physicians want to be able to monitor the level of anticoagulation. And that is anywhere from – when we ask the question, it typically comes out at 40% where the physicians want to be able to monitor the level of anticoagulation with a quick finger-prick test. There are also patients that are completely excluded from the trials of the DTIs and kinase like patients with renal failure and with – and that’s probably 18% of the people who are taking Warfarin today, and then patients who have mechanical heart valves are precluded from those studies. So when you sum it all up, there is a significant portion of patients where a monitorable [ph] agent that’s superior to Warfarin would have a significant role.

Bill Tanner – Leerink Swann

Got you. And then maybe, Paul, just another question for you, and maybe it’s just fairly (inaudible) question may be difficult to reply. But just thinking about the model overall, I mean, obviously capital markets have changed a lot since you guys went public last year and who knows what they are going to look like going forward, and understanding the strategic importance of the recent financing, but how do you sort of think about – is this a – cause a permanent contraction either in the pace, or (inaudible) advance things or the breadth, or would it cause you to revisit doing things, or you might engage your partner for multiple products and really just try to get more involved at the – in the early discovery phase as someone who might want to reengineer a compound so that you might be doing multiple product, thing with – agreement with a few compounds to be named, just curious.

Paul Goddard

Right. So, I can give you a short answer to that. And it relates to what John and I both did when we joined the company back in 2003, 2004. With the management team already in place, we put together a strategic plan. That strategic plan has really not changed. And in summary, very quickly, we see that some of our assets will be developed and there will be license out of proof of concept phase. And we are talking about that in a moment for 5923 and 2042.

We have always believed that 7505 as we did with Procter & Gamble and as we would hope with another partner, we would retain co-promotion rights for that product, giving us access commercially ultimately to both the gastrointestinal specialty as well as the metabolic specialty through gastroparetic patients. We have other compounds that are at research that can quite frankly ready to go to R&D stage once we have appropriate funding, which we could bring through development to essentially broaden that portfolio.

So we haven’t changed our approach to that strategy. I think the question arises at the moment is how fast we’re able to deploy it. So, to your point about what do you do next, we will have them, we will continue to have plenty of opportunity to bring other compounds through development. And as we look at our financial projections from milestones that will come from some of the initial partnering, that will provide us with enough capital to be able to develop those through proof of concept.

I presume sometime in the future we will be able to go back to the capital market to take one step up, as we consider moving in the commercialization space. So, our strategy hasn’t changed. I think basically it’s going to be the length of time it’s going to take for us to get there. And obviously, in these kinds of markets it’s being able to stay the cause with a strategy, which is clearly enunciated, which is going to be important.

Bill Tanner – Leerink Swann

Okay. It makes sense. And congrats on the financing and I know that will help you guys out.

Paul Goddard

Thank you. We certainly hope so. Thanks a lot.

Operator

We’ll go now to our next question from Steven Harr with Morgan Stanley.

Steven Harr – Morgan Stanley

Yes. Good morning, guys.

Paul Goddard

Hi, Steve.

Steven Harr – Morgan Stanley

I was just hoping you could just give us a little bit more clarity around what it is that you need to show with ATI-5923 head-to-head versus Coumadin to, one, get registered, and then two, to get the type of label I think you and your investors and potential partners are hoping you would get, which is a superiority claim to Coumadin and keeping patients in range.

Paul Goddard

So, okay. The primary endpoint, Steve, is very clear. And that is over the totality of the treatment period, which is six months in this study that as a cohort analysis of the time in therapeutic range of 5923 compared to Warfarin should be shown to be superior. What do we mean by that? The literature tells us that a 10% decrease in time in therapeutic range leaves a substantial change in morbidity risk. And that’s been shown – and mortality risk. That’s been shown through many different papers. So basically what we have done in putting together this study is at a minimum, a 10% difference would be demonstrated in this study. (inaudible) is Warfarin for the cohort analyses. And that should allow us with robust data, meaning that P equals to a less than 0.1 level, allow us to get a superiority claim over Warfarin.

Steven Harr – Morgan Stanley

So just to be clear, that’s a 10% relative or absolute benefit? And the second part of that would be clearly then you need to have two things, right, which is both a statistical test as well as a point estimate test. Is that correct? So you need that 10% difference.

Paul Goddard

So, it’s like –

Steven Harr – Morgan Stanley

Let’s take the P as 0.01, but it’s an 8% difference. I’m just trying to get a sense of how you view, how regulators and you would view that type of a result.

Paul Goddard

Okay. So with – we have size study at 10% – for 10%. Right? And so that’s how the statistical analyses claim has been applied. If we end up with less than 10%, I don’t know how I will react. I don’t know how I will react to that. What has been clear is that a – again, just to reiterate, a relatively small difference in time in therapeutic range leads to a mortality, morbidity difference. But we have sized a study based on what we have seen to be the profile of 5923 for that 10% difference or more.

Steven Harr – Morgan Stanley

So just – again just to be clear, that’s 10%, absolutely 10% –?

Paul Goddard

Absolutely. Absolutely, yes.

Steven Harr – Morgan Stanley

Perfect. All right. Thank you.

Operator

We’ll take our next question from Dominique Semon with Merlin Nexus.

Dominique Semon – Merlin Nexus

Yes. Hello, everyone. This is Dominique. Congratulations. First of all, congratulation on financing. Can you hear me?

Paul Goddard

Yes, absolutely.

Dominique Semon – Merlin Nexus

This is very good news for ARYx and I fully appreciate it. But the reality is that this contraction is also very costly and painful for existing stockholders. So, while I understand – and you’ve made it fairly clear it will give you a much better opportunity to access non-dilutive capital. But the reality is that ARYx even after the financing remains somewhat under-capitalized to about five or six quarters of cash. So therefore I have to ask, what is the company doing to reduce the burn, and that like most other companies have or doing presently to a new environment of very high cost of capital?

John Varian

Sure. So, thanks, Dominique. What we have done is we have reduced all extra expenses besides the two studies that are ongoing right now. When you look at our external spend, it is almost – I won’t say 100%, but it’s very, very substantially focused on two things; getting the 600-patient study done that’s ongoing right now for 5923 and finishing the 70-some patient study for 2024 that will be done at year-end. Those expenses and those costs, which are reflected in our spend this quarter, next quarter and that will start tailing after that, are very important spendings because those would be the things to get a partnering done, which will then bring cash into the company.

Our headcount has been at about – I think it’s about 75 people right now – 72, 73 people right now. It has been at that level for about 18 months I believe and there is not a planned increase in headcount. We do need that number of people to support Phase II studies that we have ongoing right now. And so what we are focused on is, having a small internal staff, when we spend external dollars, we want them to be impactful [ph] toward driving us toward value and partnerships. And that’s what we’re spending the big money on right now.

And that we think that that spend will bring in bigger dollars from the partnerships that we have ongoing. And as Paul said, the steady-state of the company being able to do a couple of Phase II programs at a time. We think we can maintain the company on the funding that we just brought in, the partnerships we plan to do for the foreseeable future. We will not go back to the equity markets unless (inaudible) choosing if we want to expand beyond that steady-state that we can operate at now.

Dominique Semon – Merlin Nexus

Okay. But there is no formal plan to announce a further restructuring here?

John Varian

No, because where we stand right now is we have a small internal staff that is very effective at running these studies and what we have are these two big studies that we absolutely have to complete. And if we don’t complete those studies, we will have lost great amount of value –

Dominique Semon – Merlin Nexus

Of course, of course. Okay. I’d assume that there was perhaps ways to cut further while of course maintaining the integrity of the two programs you have been referring to here?

John Varian

Well, what we did, as you remember, in the quarterly conference call, once P&G pulled on us. Right? We went through and said, okay, where should we spend the money we have. And we said these two studies and that’s it, basically. And so what’s happened is 9242, which is a great program, our atypical antipsychotic, it’s great program. We took it into Phase I and we’ve stalled it there. And we are going to wait and keep it stalled basically until we get the next product off out of our – off of our spend, and we have the money then to kick that program back up. And we have two INDs we could file in the next six to 12 months, but we’re not going to file those until we have the money to do so. So we have, in fact, stepped back, stopped things that we would like to be doing, but we can’t afford to do right now. And we’re not about to, even with this financing, reinitiate those programs. The partnering is what we’re focused on right now.

Dominique Semon – Merlin Nexus

Okay. All right, John, thank you.

John Varian

Thank you.

Operator

(Operator instructions) We’ll go now to Joe Aguilera with BioRevolution Capital.

Joe Aguilera – BioRevolution Capital

Hi, Paul. Hi, John. Congratulations on the financing. Just a quick question for you, Paul, maybe. On a pre-dated deal, what are you anticipating on a pre-dated deal? And also what are you anticipating if you do an after-dated deal since you’re so confident on signing a deal, because we did dilute pretty heavily here? I just want to get your thoughts on that. What are you anticipating if you bring in from a pre-dated deal? Because if we go out another year with the burn rate, et cetera, and the date is going to be out the first half of next year, I’m assuming there won’t be a deal until another year, possibly until next December. So, can you explain that?

John Varian

Joe, this is John. If Paul answered that question as to what we’d bring in on the choosing our extra deals, I would probably walk out of the building right now. So –

Joe Aguilera – BioRevolution Capital

I mean, what are you guys anticipating, I mean approximately because you had to –

Paul Goddard

No, I (inaudible) going to answer that, Joe, because people – people listen to these calls, right? And the people that we’re talking to, if they have any idea of what our expectations are, it would really hurt our negotiating position. So, not to be (inaudible), but we’re absolutely not willing to answer that question. When it comes to the general plan, as I said, we have the cash that takes us out for 18 months and with no deals. Right? We have data from 2042 at year-end this year, in the next couple of months here. Right? And with those data, we think we can do a deal, which then adds to the cash.

As we said, if we don’t do a pre-dated deal on 5923, we get those data at June 30, we will have bolstered our cash position about that time from the 2042 deal. And then we have time to do the right deal for 5923. And also in the mix is 7505, which we think is a very valuable asset. We have had unsolicited interest in that program, but we are not ready to go out and actively partner yet. But when you look at the cash we have and look at the data we’re developing and look at a reasonable assumption around when we could data based on – do deals based on the data that we’re generating, it all fits together in a way that we feel very comfortable that the existing products profile would be able to generate the kind of deals that we can finance the company without every getting to the point where we have to be looking at that kind of a cash crunch again.

Joe Aguilera – BioRevolution Capital

And we have 27.2 million shares out now with the new financing?

Paul Goddard

Right. So, 9.6 million added in the 17.7 million I think that’s outstanding.

Joe Aguilera – BioRevolution Capital

Right, okay. And then – okay. And how do the doctors right now feel about 5923 poll at this stage versus Warfarin?

Paul Goddard

Well, as we have conducted a blinded study, it’s tough for them to have any opinion. All I can tell you is that within a very short period of time, we completely enrolled that study. And that is a reflection of the enthusiasm, which each of these treatment centers have had for the concept of the product and what they saw in the two open-label studies that we did.

Joe Aguilera – BioRevolution Capital

Okay. Thanks, guys.

Paul Goddard

Thanks, Joe.

Operator

Having no other questions at this time, I will turn it back to management for closing remarks.

Paul Goddard

Thank you very much and thanks for your questions today. I just wanted to clarify a point, which in relationship to a question that Steve asked, because I think was not particularly clear. The 10% absolute difference in terms of time in therapeutic range has been shown to have in the literature a significant impact on morbidity and mortality. What I incorrectly said is that to show it at 0.1 level, we need an 8% difference absolute. And the 0.5 level, which wasn’t us, but I’d mention it anyway. It’s 6%. So, 6%, 0.5; 0.1, 8%; and then the literature tells you 10% is a significant mortality difference. So, sorry, Steve, I was not clear about that.

Turning to the summary, we’ve obviously made a significant progress since the end of the second quarter. We’re now well capitalized and have sufficient resources to take our products to late stage trials. We have important clinical milestones enabling us to report data from ATI-5923 and 2042 according to the schedule we have set. And we have added leverage in our partner discussions, thanks to financing flexibility afforded by our strong balance sheet. So the next several quarters will be extremely active for ARYx and we look forward to keeping you updated on the clinical and corporate developments as they occur. I’d like to thank you once again, and also thank our employees, investors, and scientific collaborators for the commitment towards our common goal of making proven therapies safer.

Operator

Ladies and gentlemen, thank you for your participation. This does conclude today’s conference, and you may now disconnect your lines.

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