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Maxygen, Inc. (NASDAQ:MAXY)

Q4 2008 Earnings Call

February 10, 2009 4:30 p.m. ET

Executives

Russell Howard CEO

Larry Briscoe CFO

Elliot Goldstein – COO and CMO

Analysts

Eric Schmidt Cowen & Company

Marshall Urist Morgan Stanley

Han Li Stanford Group

Operator

Good day ladies and gentlemen and welcome to the fourth quarter 2008 Maxygen Incorporated earnings conference call. My name is Camesia (ph) and I would be your operator for today. (Operator instructions)

I would now like to turn the call over to your host for today’s call, Mr. Russell Howard, Chief Executive of Maxygen. Please proceed sir.

Russell Howard

Good afternoon and thank you for joining us. I’ll start today’s call by reminding that our discussions during this conference call will include forward-looking statements regarding our business prospects and financial condition. Actual results could differ materially from those projected in the forward-looking statements. The factors that could cause actual results to differ are discussed in Maxygen's 2007 annual report on Form 10-K, included under the caption Risk Factors, and then our reports on Form 10-Q and Form 8-K. These reports are available on our website at www.maxygen.com in the investor's SEC filing section.

Now I’m going to recap business highlights for the fourth quarter and full year 2008. I’ll then provide an update regarding the recently announced change to our corporate strategy. I’ll then turn the call over to Larry Briscoe, our CFO to discuss the quarterly and year-end financials. And after that we’ll open up the call for Q&A.

First, a brief chronology of significant events during 2008; to reduce our forward cash bond in Q1 2008, we closed our facility in Denmark, terminating all but a few employees who came to our US site. And we moved all of our Denmark programs to our US based pre-clinical and clinical development teams. All programs were kept on track during this closure. In the second half of 2008, we announced three achievements for our Discovery programs. First, we sold MAXY-VII, our Factor VII program and grant certain licenses to our technology platform to Bayer in a $120 million transaction in which we received $90 million cash upfront. Second, we received a $3.4 million government grant to continue work on our HIV vaccine programs. And third, we sign a MAXY-4 collaboration agreement with Astellas Pharma. This last agreement represents an attractive arrangement for sharing development cost for MAXY-4. We received $10 million cash upfront and are eligible for future milestones under this agreement with Astellas.

In October we announced that we would begin evaluating strategic alternatives with respect to all aspect of our business. We announced that Maxygen had retained Lazard statistics (ph 0:02:50) in this process. In connection with our revised corporate strategy we also made the decision to delay Phase III manufacturing activities and Phase II the clinical trials of our MAXY-G34 program until we identify a partner who would share this cost. As you may recall, we expected Phase IIb trial of MAXY-G34 to begin in the second half of 2009.

In December, we completed the Phase IIa clinical trial of MAXY-G4. Initial order of result from the trial was reported in November of 2008. Our results indicated that MAXY-G34 is safe and well-tolerated in breast cancer patients with no drug related serious adverse events, no drug related Grade 3 or Grade 4 adverse events and no immunogenicity reported in any patient receiving MAXY-G34.

Today, we reiterate all of these results and confirm the program is on track to complete final quality assurance and data base look later this month of February.

One final note regarding our MAXY-G34 program today; as you’re aware Amgen patent number 7381804 granted in 2008 related to various G-CSF mutants. As we’ve noted previously, this patent expires in 2015. We have previously indicated that we do not think this patent should have been granted. Accordingly I can report today that we have filed a request for an inter-parties re-examination of this patent in the United States Patent and Trademark Office. While I can give you no assurance as that the PTO will grant our request for re-examination or if granted that we will ultimately prevail, we believed that this is an important statement on our attempts to protect our intellectual property position. The request should soon be published and available through the website of the US Patent and Trademark Office. We intend to also provide a link to the filing on our website at www.maxygen.com once it is published.

As a consequence on a decreasing investment in the MAXY-G34 program and in order to preserve cash while we evaluate our strategic options, at the end of 2008, we also implemented a restructuring plan that will result in termination of approximately 30% of our workforce. At Maxygen we currently plan to retain approximately 65 employees with a primary focus on maintaining our MAXY-4 collaboration with Astellas, continuing minimal activities on our MAXY-G34 program and protein drug discovery activities for auto-immune disease therapies. These actions have reduced spending considerably.

We believed the above decisions, which shall appreciate, were difficult; were the wisest cost of actions given the current environment and it’s impact on the biotechnology industry. Our goal now is to continue our work with Lazard to secure our maximum value of the company’s assets for our shareholders through the sale of the company, the sale of individual company assets, a merger or other strategic transactions. We are currently fully engaged in this process and we’ll provide you with additional updates as appropriate.

I’d now like to turn the floor over to Larry to review the financials for the quarter. Thank you, Larry.

Larry Briscoe

Thanks Russell. Maxygen reported a GAAP net loss of $7.7 million or $0.21 per basic share for the fourth quarter of 2008 compared to a GAAP net loss of $11.3 million or $0.31 per basic share in the fourth quarter of 2007. The change in net loss was primarily due to a decrease in research development expense, the restructuring charges all set impart by a decrease in revenue.

Revenue for the fourth quarter of 2008 was $6 million compared to $11 million for the same period of 2007. The decrease in revenue resulted from a decrease in revenue under Maxygen’s license agreement with Codexis related to biofuels offset impart the revenue received under the company’s collaboration agreement with Astella’s first MAXY-4 program which began in September 2008.

Total expenses were $14.5 million in the fourth of 2008 compared to $23.7 million in the fourth quarter of 2007. The decrease in expense was primarily due to reduced salaries and benefits resulting from the closure of our Denmark operation in the first quarter of 2008. Decrease external expenses associated with the cost to manufacturing of MAXY-VII for clinical trials and decrease restructuring charges.

For 2008 we reported net income of $30.3 million or $0.82 per basic share compared to our 2007 net loss of $49.3 million or a $1.34 per basic share. The main component of this year-over-year change was the $90 million we received from Bayer in July 2008 for the sale of our hematology asset and a grant of certain license rights.

Our cash, cash equivalent and marketable securities as of December 31, 2008 totaled $206.5 million as compared to $145.8 million at the end of 2007. In addition, due to the recent announced slowdown of MAXY-G34 and reduction in force in Q1’09 we projected operating cash utilization for 2009 at approximately $17 million. Operating cash utilization is a non-GAAP financial measure thus defying net loss adjusted to include capital expenditures and exclude then pack of stock compensation, depreciation, goodwill and restructuring charges.

I’ll now turn the call back over to Russell for closing remarks.

Russell Howard

Thanks Larry. As Larry mentioned, we ended 2008 with over $200 million in cash and no debt. In addition to this significant cash asset, which we’re consciously preserving, we have a substantial list of assets including the MAXY-4 partnership with Astellas, the MAXY-G34 program, a fully funded vaccine discovery program, a potential $30 million milestone payment from Bayer, a MolecularBreeding platform for generating autoimmune disease therapeutics, an addition of 25% ownership in Codexis and a revenue stream from our biofuel’s license in Codexis and a widely cited intellectual property at stake, I worked with Lazard to create value from these assets is ongoing and we look forward to advising you in the future of the outcome.

Thank you everyone for your time today and I’m happy to take any questions.

Question-and-Answer Session

Operator

(Operator instructions)

And your first question comes from the line of Erich Schmidt from Cowen and Company. Please proceed.

Eric Schmidt – Cowen & Company

Hi good afternoon, Russell.

Russell Howard

Hi, Eric.

Eric Schmidt – Cowen & Company

When you and your partners, I’m sorry, you and your strategic advisers engaged partners in these discussions, are you directing them in a specific outcome? You know (inaudible) event as opposed to a corporate collaboration or at a sale of partial assets?

Russell Howard

No, we’re not directing them. We’re open to hearing also what their proposal so that we can see the best net, net result.

Eric Schmidt – Cowen & Company

Have you direct them to specific timeline?

Russell Howard

We have a timeline, which is to be as expeditious as possible and we are driving the process forward by working very hard with people and driving to have them give us very clear answers. We do have a timeline, but I’m not going to discuss that today.

Eric Schmidt – Cowen & Company

So, there’s an undisclosed date by which all offers have to be received, is that fair?

Russell Howard

No, not described.

Eric Schmidt – Cowen & Company

Okay. And on the MAXY-G34 program, when might we see the full data presented in a more of (inaudible) all of the information?

Elliot Goldstein

Yes, it’s Elliot Goldstein here, the CMO. Hi. Just a bit the time we submitted an abstract to ASCO we’ll know if it has been accepted and if so under what form. I think about the 9th of March, but say first half of March we’ll know whether it’s been accepted or not. So that would be sort of the first presentation of two-cycle chemotherapy data to the medical community and we expect the final study report to be available towards the backend of the second quarter.

Russell Howard

In addition, we’ll be having scientific presentations through the regular scientific literature to be submitted, but of course with scientific paper you can’t expect to read them for perhaps nine months to a year and a half.

Eric Schmidt – Cowen & Company

So, we’re targeting ASCO then.

Elliot Goldstein

Yes. ASCO is the next potential –

Russell Howard

And there will be communication of the Phase-IIa clinical result. There are other plans for some of the Phase-I working free clinical, but I think the most important is the ASCO presentation.

Eric Schmidt – Cowen & Company

Thanks very much.

Russell Howard

Okay.

Operator

And your next question comes from the line of Marshall Urist from Morgan Stanley. Please proceed.

Marshall Urist – Morgan Stanley

Hi guys, good afternoon. Just to follow up a little bit on Eric’s question. Can you give some sense though, have the discussions been more productive around certain groups of assets or that is that how people are thinking about the discussions that you have so far?

Russell Howard

No, I can’t give you any comment on that Marshall. We’re open too also to scenarios as described. Whether it be merger, reverse merger, particular assets or group of assets, all of these things are on the table.

Marshall Urist – Morgan Stanley

Okay, Got you. And then-- From a just a general timeline point of view, I mean I know that if you don’t want to give something specific, but should we be thinking that by the middle of the year, some time, maybe we might be able to get a another update?

Russel Howard

No, I can’t give guidance, Marshall.

Marshall Urist – Morgan Stanley

Okay, finally thanks. And also just from any of the collaborations, you know Bayer’s progress or from Astella’s, any other kind of milestone we should be looking for this year?

Russell Howard

No, it would be too soon. Bayer will basically give us those milestones when they’re done. So obviously Factor-VII is in the hands of Bayer and some time we’ll be able to announce that $30 million milestone if and only if we enter Phase-II, but I can’t give you a timing on that cause that’s now Bayer’s propriety. And then with Astella’s timely (ph) with MAXY-4, I can simply say that the program with Astella’s is a very exciting program. It’s great to be pushing forward this exciting drug possibility.

Marshall Urist – Morgan Stanley

Okay, great. Thanks guys.

Operator

And your next question comes from the line of Han Li from Stanford Group. Please proceed.

Han Li – Stanford Group

Yes, a question for Russell. How G34, was Amgen’s patent blocking G34 potential market entry on June 2015. I know you’re challenging it. Can you comment on the neutropenia market at US and all international market in Asia or Europe and those with potential after in those (inaudible) area?

Russell Howard

I’m going to pass the question over to Elliot, actually, but is your question in 2015? Are you looking for some guidance on Neulasta market outside the US? Is that the question Han? Or now?

Han Li – Stanford Group

2015, I’m talking about in the next two or three years international market for neutropenia.

Russell Howard

Oh, Elliot, why don’t you try to –

Elliot Goldstein

Yes. Up until the last couple of years since we introduced the subject the market especially for a single shot there b.i.d. is mainly being used in the US. Where in the total $3 billion, it was about $2.4 billion, I think in 2007. That situation is changing. The market expected to reach $5 billion in the next three or four years worldwide and interestingly a lot of the growth I think is up in Europe, especially western Europe. Neulasta is being used more and more and some of the so called (inaudible) are now being introduced not only in western Europe as you know, but in some Asian countries like in India, for example there’s a (inaudible) G-CFS on the market similar to Neulasta as well four, five generic Neupogen-type drugs. So, to sum it up approximately $5 billion this market worldwide over the next three or so years, which is the time frame you’re referring to, right now 80% of that, 70% to 80% of that in North America, but there’s a low double digit growth in Europe expected over the next three or four years and about high single digit growth in the US.

Han Li – Stanford Group

Got it. Thanks.

Operator

(Operator instructions) At this time, there are no questions, thank you. I will now turn the call over to Mr. Russell Howard for closing remarks.

Russell Howard

Hello everyone, well thank you for listening to the call today. It’s a pleasure to update you on our current status and progress and I’ll look forward to announcing you all the next stage of Maxygen’s history. Thank you.

Operator

Thank you for your participation in today’s conference. This concludes your presentation. You may now disconnect and have a wonderful day.

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Source: Maxygen, Inc. Q4 2008 Earnings Call Transcript

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