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Targacept, Inc. (NASDAQ:TRGT)

Q3 2008 Earnings Call Transcript

November 6, 2008, 5:00 pm ET

Executives

Don DeBethizy – President and CEO

Alan Musso – CFO, VP, Treasurer, and Assistant Secretary

Analysts

Terence Flynn – Lazard Capital Markets

Bret Holley – Oppenheimer

Bill Tanner – Leerink Swann

Kim Lee – Pacific Group Equities

Operator

Good day, ladies and gentlemen, and welcome to the third quarter 2008 Targacept earnings conference call. My name is Emmanuel and I will be your operator for today. At this time, all participants are in a listen-only mode. We will conduct a question-and-answer session towards the end of this conference. (Operator instructions) As a reminder, this conference is being recorded for replay purposes.

Any statements made, or responses given during this conference call that are not purely historical in nature on secured forward-looking statements, made under the provisions of the Private Securities Litigation Reform Act of 1995. Forward-looking statements include, without limitation, statements regarding the progress or scope of the research and development of our product candidates, such as the number of subjects to be enrolled in, or the timing for initiation or completion of any of our clinical trials; the indication for which any of our product candidates may be developed, or their timing for reporting of results from AstraZeneca’s HALO trial, or for a decision of AstraZeneca whether to conduct additional clinical development of AZD3480; the possible therapeutic benefits of our product candidates; any future payments that AstraZeneca or GlaxoSmithKline may make to us; or our plans, expectations for future operations, financial position, costs, or expenses.

Actual results may differ materially from those expressed or implied by forward-looking statements as a result of various important factors, including, without limitation, those described under the heading Forward-looking Statements in the press release that we issued earlier today, or under the heading Risk Factors in our most recent Annual Report on Form 10-K and other filings that we make with the Securities and Exchange Commission. Such forward-looking statements speak only as of today, and should not be relied upon as representing our views as of any date after today. We disclaim any obligation to update any forward-looking statements, except as required by applicable law.

I would now like to turn the call over to your host for today, Dr. DeBethizy, President and CEO of Targacet. Please proceed, sir.

Don DeBethizy

Thank you, Emmanuel. Good afternoon ladies and gentlemen and welcome to Targacept’s third quarter 2008 conference call. I am Don DeBethizy, President and Chief Executive Officer; and with me on this call is Alan Musso, Targacept’s Chief Financial Officer.

During this call, I will provide an update on Targacept’s product development programs and business activities, and then Alan will review of financial results for the third quarter ended September 30, 2008, which we have just released.

In the third quarter, we continued to execute on our programs and build upon our leadership position in the NNR field. We are fortunate to have a broad pipeline of NNR Therapeutics and development for several major indications, as well as deals with two off the world’s leading pharmaceutical companies that support our research and development efforts and provide opportunities to capitalize on our proven ability to design highly targeted compounds with diverse pharmacologies and grow our portfolio.

Now let me review with you our programs. I will begin with AZD3480, which has been known historically as TC-1734, and is being evaluated as a treatment for three different cognitive disorders. On September 15, we announced that the results from the Phase IIb clinical trial in mild to moderate Alzheimer's disease, conducted by AstraZeneca, known as the Sirocco trial, were inconclusive. Neither AZD3480 nor the active comparator donepezil met the trial’s criteria for statistical significance on the primary outcome measure, ADAS-Cog; with both results being impacted by improvement in the receiver group.

In our announcement, we reported encouraging findings on secondary outcome measures in the trial, the Alzheimer's Disease Co-operative Study – Clinical Global Impression of Change, which has set this domain to cognition, behavior, and social and daily functioning, and the mini-mental state examination, known as the MMSC, which measures cognitive impairment.

Since September 15, additional analyses of data from the Sirocco trial is being completed, and we and AstraZeneca have met with four internationally recognized leaders in Alzheimer's disease research. The consensus feedback received was that the results on key secondary measures were encouraging, and could support additional clinical development of AZD3480 in Alzheimer's disease. We and our colleagues at AstraZeneca are considering the additional analysis and the input received as we evaluate potential next steps with regard to the development of AZD3480 in Alzheimer's disease.

In particular, we and AstraZeneca are actively engaged in outlining how any additional clinical trials might be designed, including duration, dosage strength, inclusion criteria, and primary and secondary endpoints. Under our agreement, AstraZeneca has the right to determine whether to conduct any further development of AZD3480, including in Alzheimer's disease.

The Sirocco trial was the first time AZD3480 has been studied in patients with Alzheimer's disease, and based on the overall findings, feedback received from leading researchers in the field, the substantial unmet medical need, and the very favorable tolerability profile that AZD3480 has consistently exhibited, we remain hopeful that AstraZeneca will decide to advance AZD3480 to additional clinical studies in Alzheimer's disease.

We expect a decision from AstraZeneca by the end of the year, following the expected availability of top line results from AstraZeneca’s separate Phase IIb trial in cognitive dysfunction and schizophrenia, known as the HALO trial, which I would now like to segue to.

As we previously reported, the HALO trial is fully enrolled. The trial is being conducted in the United States and Canada, and the primary outcome measures are five cognitive domains as measured by a computerized test battery known as IntegNeuro that is designed to meet the essential testing criteria identified by the Matrix Initiative of NIMH. Top line results are expected in December 2008. There is currently no product approved specifically for the treatment of cognitive dysfunction and schizophrenia, and we believe the potential market is substantial. It has been estimated that there are 7.9 million schizophrenic patients in the world’s seven major pharmaceutical markets, and that approximately 75% of all schizophrenic patients are cognitively impaired. Treating the cognitive dysfunction is very important for restoring quality of life for individuals with schizophrenia.

Before moving on to the rest of our portfolio, let me say a brief word about our adult ADHD trial. As you know, in addition to Alzheimer's disease and cognitive dysfunction and schizophrenia, AZD3480 is being studied in an exploratory Phase II trial in adult ADHD. That trial continues to progress, and as of November 4, 21 of an expected 24 total subjects have been enrolled.

Now, with regard to TC-5619, our highly selective alpha7 NNR-targeted product candidate that is planned for development for cognitive dysfunction and schizophrenia, and potentially one or more other conditions characterized by cognitive impairment, we have recently completed dosing in a Phase I multiple rising dose trial. In both the MRD trial and our completed Phase I single rising dose trial, TC-5619 was generally well tolerated at doses substantially greater than the doses we plan to study in future trials.

Following our completion of Phase I clinical development, and a planned Phase II clinical proof of concept trial, AstraZeneca has the right to license TC-5619. If 5619 it achieves clinical proof of concept, and AstraZeneca licenses it, the pre-negotiated terms provide for AstraZeneca the payout of a $40 million fee, for us to be eligible for substantial pre-commercialization milestones and step double digit royalties on future product sales, and for AstraZeneca to assume and fund all later stage development and commercialization.

Turning now to our depression program, where we have retained the commercial right, our Phase IIb clinical proof of concept trial of TC-5214, a broad spectrum NNR antagonist as an augmentation therapy in subjects with major depressive disorder, or MDD is now well underway. As of November 4, 200 out of an expected total of 560 subjects have been enrolled in the first of the trial’s two phases, and we are on target with our goal for reporting top line results in mid 2009.

The design for our ongoing Phase IIb trial is similar to and incorporates the learning from our previous Phase II TRIDMAC study that generated encouraging results. In the first phase of this trial, following a washout period, subjects diagnosed with MDD are treated once daily with a 20 mg dose of the marketed SSRI Citalopram for four weeks, and then with a 40 mg dose for the next four weeks. Subjects who tolerate the Citalopram, but who score on the Montgomery-Asberg Depression Rating Scale or MADRS, has improved less than 50% from baseline, and is no lower than 17, are considered partial or non-responders to be randomized into the double blind second phase of the trial.

These subjects receive either TC-5214 or placebo, together with continued Citalopram therapy for an additional eight weeks. We anticipate that approximately 220 or about 40% of the subjects will be randomized into the second phase of the trial. The primary outcome measure is change from baseline during the second phase of the trial as measured by the Hamilton Depression Rating Scale or HamD.

We believe that the results of our previous Phase II TRIDMAC trial demonstrate the promise for a new NNR mechanism of actions for MDD, and bode well for the clinical potential of TC-5214 as an augmentation therapy. Based on the preliminary commercial assessments, it is clear that physicians are in need of new treatment options for the many patients that do not respond well to standard SSRI first-line medications, which is estimated to be at least 40% of the patients. The National Institute of Mental Health estimates that major depressive disorder affects approximately 14.8 million adults in the US alone, making this a substantial societal need and commercial opportunity.

Now let me provide an update on our alliance with GlaxoSmithKline, through its center of excellence and external drug discovery. This uniquely structured deal provides us a foundation to leverage our proven discovery and development capabilities and accelerate the progression of our pipeline. Specifically, our eligibility for up to $16 million in success based progress milestones prior to initiation of Phase II in each of five therapeutic focus areas, pain, smoking cessation, obesity, addiction, and Parkinson's disease, allows us to advance programs that might otherwise be inactive, and creates multiple opportunities to expand our portfolio and diversify risk inherence in drug development.

Moreover, if our programs achieve clinical proof of concept, and GSK exercises its options, we expect to benefit from the late stage development and commercialization expertise and resources of a premier global pharmaceutical company, while at the same time retaining considerable value. We are eligible to receive up to $1.5 billion from GlaxoSmithKline, contingent on the achievement of specified discovery, development, regulatory and commercial milestones in the five therapeutic focus areas, as well as stepped double digit royalties.

Now moving on to TC-6499, which is planned for development in neuropathic pain. It is a clinical stage product candidate subject to this GSK alliance. We are currently conducting Phase I multiple rising dose trials of TC-6499 and expect to complete the trial by the end of the year.

In October, we achieved two preclinical milestone events in the alliance associated with progress in our smoking cessation and paint programs. These milestone events triggered $1 million in payments to us. We have now received $42.5 million from GSK since formation of the alliance in July 2007.

Before turning to call over to Alan, I would like to mention a recent honor we were fortunate to receive. The Licensing Executive Society or LES, named Targacept together with GlaxoSmithKline and AstraZeneca, as the winner of its 2008 Deal of Distinction Award in the healthcare sector. We are delighted that LES has recognized these deals, which we believe validate the promise of the NNR mechanism, highlight our ability to design highly targeted NNR therapeutics, and affirm our leadership position in the NNR space. We are also very pleased to share the award with our deserving colleagues at GlaxoSmithKline and AstraZeneca, who share our commitment to building health and restoring independence for our patients in need. We look forward to continuing to work closely with them to bring novel NNR therapeutics to market.

And now, let me turn the call over to Alan Musso, our Chief Financial Officer.

Alan Musso

Thank you, Don. Let me now to be with you our financial results for the third quarter 2008.

We ended the third quarter of 2008 in a strong cash position, with approximately $94 million in cash, cash equivalents and short-term investments. We project that our current cash will fund our operating requirements at least through the end of the third quarter of 2010. Between now and then, we are eligible to receive several milestone payments contingent on the achievement of clinical development related events under our agreements with AstraZeneca and GlaxoSmithKline that are not captured in our baseline forecast, which if we're successful, could further extend our cash run rate. We continue to focus on the efficient use of capital and controlling our expenses as we execute our business plan in these challenging economic times.

Turning to our operating results, for the third quarter of 2008, we had a net loss of $7.6 million, compared to a net loss of $7.4 million for the third quarter of 2007. In the third quarter of 2008, our net operating revenues were $4.1 million, compared to $3.1 million for the third quarter of 2007. The increase was principally due to an additional $586,000 of milestones and license fees, which reflect an increase in deferred license fee revenue from payments that we received from GlaxoSmithKline in July 2007 and from GlaxoSmithKline and AstraZeneca in the fourth quarter of 2007. The higher net operating revenues were also attributable to an increase of $361,000 in collaboration research and development revenue, resulting from additional work performed in preclinical research collaboration with AstraZeneca.

Our research and development expenses totaled $10.7 million for the third quarter of 2008 compared to $9.4 million for the third quarter of 2007. The higher research and development expenses were principally due to an increase of $1.2 million in costs for third-party preclinical research and development services incurred primarily in connection with the research collaboration with AstraZeneca and our execution of programs in the therapeutic focus areas in the lot of the alliance with GlaxoSmithKline. The higher research and development expenses also reflected an increase of $160,000 in costs for third-party research and development services incurred for clinical stage product candidates. In the 2008 period, these third-party costs totaled $3.3 million and were incurred principally for TC-5214, TC-5619, and TC-6499.

Our general and administrative expenses were $1.4 million for the third quarter of 2008 compared to $1.9 million for the third quarter of 2007. The decrease was primarily attributable to go to a reduction of $355,000 in compensation related expenses, primarily as a result of reduced accrual from (inaudible).

Our net interest income was $514,000 for the third quarter of 2008 compared to $1 million for the third quarter of 2007. The decrease was principally attributable to lower short-term interest rates and increased indebtedness under our loan facility used to finance laboratory equipment, furnishing, software, and other fixed assets.

Taking into account our financial results today, we are updating our financial guidance for 2008. Based on current operating plans, we now expect our net operating revenues for the year ending December 31, 2008 to be in the range of $18 million to $20 million; our operating expenses for the year to be in the range of $50 million to $53 million, which is down from a real guidance of $60 million to $65 million; and our cash and cash equivalents and short-term investments balance to be at least $82 million at December 31, 2008, which is up from our previous guidance of $75 million.

And now let me turn the call back over to Don.

Don DeBethizy

Thank you, Alan, and thanks to everyone again for joining us on todays call. We would be happy to take any questions you may have.

Question-and-Answer Session

Operator

(Operator instructions) And our first question will come from the line of Terence Flynn of Lazard Capital Markets. Please proceed.

Terence Flynn – Lazard Capital Markets

Hi, good afternoon. Just a couple of questions. I was just wondering if you could share with us – sorry I apologize, I know you went through this in the opening remarks – but just maybe you could give us some additional feedback on the – you guys received from the thought leaders with respect to the Sirocco trial and maybe some of their current thoughts about the secondary endpoint data, but also the duration of the study and if you could help us out there, that would be great.

Don DeBethizy

First of all, I just want to remind everyone that in our disclosure in September, we reported that there was a – the numerical improvements on the mini mental state exam as well as on CTIC, and what we just reported on the call is the fact that the four experts also came to the same conclusion that those numerical changes were encouraging. So, it was consistent, we were pleased to see that and we are that supportive of the valuation that has been going on now and whether AstraZeneca moves the compound forward or not. And the second part of your question, Terence?

Terence Flynn – Lazard Capital Markets

Just the duration of the study, I know that was one thing that you guys had probably raised, maybe the duration of the study was too short at 12 weeks, to see a kind of decline in the placebo group. Did they give you any feedback on their thoughts or perspective of that, possibly the duration of the next study?

Don DeBethizy

Well, as you know; when we designed the Sirocco trial two or three years ago, we were relying on quite a bit of data out of the 90s, which indicated that you could separate from placebo and you would get placebo decline within 12 weeks. I think people looking now at Alzheimer's trials are recommending trial being longer in order to ensure that placebo declined. So if AstraZeneca decides to move forward, that would be a consideration for the length of the trial.

Terence Flynn – Lazard Capital Markets

Okay, great. And, just wondering if you guys are taking any steps with respect to expenses to kind of – given the current situation in the capital markets to try to conserve – make your cash run rate last a little longer, I know your guidance has always been second half of 2010, but just wondering if you are thinking about that or if it is still too early, maybe?

Don DeBethizy

No, I think that I am going to have Alan comment on it, but it was inherent in the numbers that he was presenting and I would like him to give you a little more color on that.

Alan Musso

Yes, today we were able to sort of update our guidance and increase our expected cash balance from what was a guidance of $75 million to being at least $82 million, and we are actively managing our business, keeping a careful eye on our expenses, being careful to let into our headcount, and then, when we are doing outsourced work, we are very aggressive in terms of assuring that we get a good turn for that work, get good value, and work through poor performance where we can to assure that our vendors deliver to us, as well as we look carefully at our portfolio and have to make choices in terms of what we fund and the timing of those. So we are making sure that we do preserve our cash, use our cash wisely and we have been able to reflect that in the updated guidance.

Terence Flynn – Lazard Capital Markets

Great. Thanks a lot guys.

Don DeBethizy

Thank you.

Operator

And our next question will come from the line of Bret Holley with Oppenheimer. Please proceed.

Bret Holley – Oppenheimer

Hey, guys. Thanks for taking the question. I had a question about clinical proof of concept, as it is defined under the Glaxo agreement; is that clearly delineated, and how fast might you get to POC in the 6499 program?

Don DeBethizy

Well there is the first part of that is – the interesting part of the GSK deal with the SEED is that these are – we are in control of development of these programs. So, we make decisions about whether compounds move forward, but we get the benefit of their experience, they have brought experience in the therapeutic areas that we're working in, and we work with them and the team, the alliance team that we have in place. So, we want to make sure that the POC design is set up such that it can compete well with NGSK for selection to move forward and for them to exercise their options. And it is really defined on a case-by-case basis, and then it is subject to the limits of some predefined elements of the agreement.

Bret Holley – Oppenheimer

Okay, so are these aspects that are in writing that they can’t essentially waffle, at some length and say, we are not sure if this constitutes (inaudible)?

Don DeBethizy

That is correct. We will have a clear idea of what proof of concept looks like as we move forward, and it is in both of our best interest. Remember the SEED is operating within GSK as a way to expand their possibilities for pipeline development, and utilizing companies that have demonstrated the ability to discover and rapidly translate preclinical compounds into the clinic and to proof of concept. So it is really focused on – which has been the subject of previous calls, on identifying companies that are strong in doing that. We are a company that is capable of doing that very well. And then, they want to be successful. So, they want to work closely with us to make sure that we have the best shot at competing within GSK for selection and the exercising of their option to move forward and agreement on proof of concept.

Bret Holley – Oppenheimer

And then to my original question, which is how fast might we get to proof of concept on 6499?

Don DeBethizy

Well, we have indicated before that it would be in the middle of 2010 before we reach proof of concept on 6499. We are in the middle of – we are moving forward in Phase I on schedule, and we are now in the multiple rising dose trial with 6499.

Bret Holley – Oppenheimer

So I presume that you start some kind of fairly meaningful Phase II program relatively early on in 2009 to meet the goal of mid 2010, correct?

Don DeBethizy

We haven't disclosed exactly when we are starting that trial. But we will have to start a trial in 2009 to meet that kind of a timetable.

Bret Holley – Oppenheimer

Okay, thanks a lot, Don.

Don DeBethizy

You bet, Bret.

Operator

And our next question will come from the line of Bill Tanner with Leerink Swann. Please proceed, sir.

Bill Tanner – Leerink Swann

Yes, thanks. Don, just a question on 3480, just on the data review, I don't know if you can comment as to the extensiveness that – understanding that you have got four experts extensiveness of the data it has gone through, and just sort of the process of – I’m guessing, involving both Targacept as well as Astra and then any contemplation of patients with different levels of dementia, in addition to or above the original treatment?

Don DeBethizy

Yes, Bill, we are very pleased with the relationship we have with AstraZeneca. It has been cooperative from the get-go, we did a lot of teambuilding early on and it is really paying off now. They have actively involved our people. In fact, Geoffrey Dunbar was involved in the original statistical analysis, we have had ongoing dialogue with them, interaction around the subsequent analysis, and I have to say that the initial top line results were pretty comprehensive. We had a good data set to draw our original conclusions around the secondary endpoints. And then, the subsequent analysis – there is nothing that has come out from the subsequent analysis that would lead us to doubt the original conclusions that we drew around the numerical values and the significance of those numerical values that we reported in the call in September. So we have been pleased with the analysis, there has been nothing that has come out so far that would say that we would change the original disclosure. So, that is encouraging, that means the top line results were pretty comprehensive, and indicator of where the activity was. I think the key now and the other point that we made during this call is the fact that the four medical Alzheimer's experts confirmed that the secondary endpoints were encouraging, that was good to get that feedback. And now, AstraZeneca is in the process of working through that and determining what the next steps would be, and as they have always said from the very beginning, they wanted to have the schizophrenia results in hand for they made those decisions about how – if and how they would move 3480 forward.

Bill Tanner – Leerink Swann

(inaudible) question, so the HALO trial would not necessarily be make or break, the HALO trial might not work and they could still decide to take 3480 ahead in AD?

Don DeBethizy

Yes, that is correct.

Bill Tanner – Leerink Swann

And then, can you remind me of just of the timeline after the HALO data become available, you may have said it earlier, I apologize if you did – the timeline in which they would have to actually decide?

Don DeBethizy

They have been consistent on the timeline of year end 2008.

Bill Tanner – Leerink Swann

Okay. So you will have the data and you will have a decision as to whether they will move forward?

Don DeBethizy

Correct.

Bill Tanner – Leerink Swann

Okay, thanks very much.

Don DeBethizy

All right, Bill. Thank you.

Operator

(Operator instructions) And our next question will come from the line of Kim Lee with Pacific Group Equities. Please proceed.

Kim Lee – Pacific Group Equities

Good afternoon.

Don DeBethizy

Hi, Kim.

Kim Lee – Pacific Group Equities

A couple of finance questions here. Can you actually break down the revenues – I apologize if I missed it earlier, what exactly were invested in sales versus (inaudible) research grants and milestones and license fees?

Don DeBethizy

Alan?

Alan Musso

Sure, yes. I could do that for you. The collaboration research and development in the third quarter was about $2.4 million; the milestones and licensees were about $1.6 million; and then our sales were about $164,000.

Kim Lee – Pacific Group Equities

Okay, great. Thanks. And I apologize if I missed it earlier, can you repeat what you said about where you are at with the TC-6499?

Don DeBethizy

We are in the multiple rising dose Phase I trial currently. And we're working through that right now. So we are on track and we have also continued to disclose that we are on track to complete the POC trial by mid 2010.

Kim Lee – Pacific Group Equities

Thanks a lot.

Don DeBethizy

Thank you.

Operator

And at this time, I show no more questions. I would like to turn the call back over to Dr. DeBethizy for closing remarks.

Don DeBethizy

Thank you very much. I want to thank everybody for joining us on this third-quarter call and look forward to the fourth quarter and our results on 3480 and continued progress on the rest of the programs. So, thank you very much.

Operator

And thank you for your participation in today's conference. This concludes your presentation, you may now disconnect. Good day.

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