J. Donald deBethizy – President and Chief Executive
Alan A. Musso – Vice President, Chief Financial Officer and Treasurer
Terence Flynn – Lazard Capital Markets
[Matt Lowe] – Oppenheimer
Jon Lecroy – Natixis Bleichroeder
Kathleen Carey – [Bay Point & Bass Institute]
Targacept, Inc. (TRGT) Q4 2008 Earnings Call Transcript February 12, 2009 5:00 PM ET
Good day, ladies and gentlemen, and welcome to the fourth quarter and year ended December 31, 2008 earnings conference call. My name is [Latrise], I will be your coordinator for today’s conference. At this time, all participants will be in a listen-only mode. We will conduct a question-and-answer session towards the end of this call. (Operator instructions)
Any statements made, or responses given during this call that are not purely historical in nature constitutes 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 timing for decision by AstraZeneca whether to conduct further development of AZD3480 in Alzheimer's disease or ADHD. The progress or scope of the research and development of our product candidates, such as the number of subjects to be enrolled in any clinical trial, the timing for initiation or completion of or availability of results from any clinical trial or the indication for which any of our product candidates may be developed, the possible therapeutic benefits of our product candidates; any future payment that AstraZeneca or GlaxoSmithKline may make to us; or our plans, expectations of future operations, financial position, revenue, cost, 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 in 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 obligations to update any forward-looking statements, except as required by applicable law.
As a reminder, this conference is being recorded for replay purposes. And at this time I would like to turn the call over to your host for today's conference, Dr. deBethizy. Please proceed sir.
Thank you, [Latrise]. Good afternoon ladies and gentlemen, I am Don DeBethizy, Targacept's President and Chief Executive Officer. And with me on this call is Alan Musso, Targacept's Chief Financial Officer who in a few moments will review with you our financial results for the fourth quarter and year-ended December 31, 2008, which we have just released.
In these very challenging times for emerging biotech companies, we have a deep and sustainable pipeline that presents multiple opportunities for clinical success. Productive alliances designed to capitalize on the proven abilities of both parties, and cash resources at the end of 2008 of over $88 million, which we expect to be sufficient to fund our operations at least through the first half of 2011.
As we begin 2009, we remain focused on the prudent management of our financial resources, and the execution of key business objectives designed to build value in both the near and long-term. Let me now review with you our programs. I'll begin with an update on our depression program where we have retained the commercial rights.
We are developing TC-5214 as an augmentation treatment for Major Depressive Disorder or MDD. We completed enrollment in a Phase IIb clinical proof-of-concept trial of TC-5214 in January 2009 with 586 subjects enrolled into the open label phase and expect to report top line results from the trial in mid-2009.
The design for our ongoing Phase IIb trial is similar to and incorporates the learning from our successful Phase II TRIDMAC study. In the first phase of the trial, following a washout period, subjects diagnosed with MDD are treated once daily with a 20 milligram dose of the marketed SSRI Citalopram for four weeks, and then with a 40 milligram dose for the next four weeks. Following the eight weeks of Citalopram monotherapy subjects 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. Based on the number of subjects enrolled in the trial and these criteria we project that over 220 subjects will be randomized into the double blind phase. The primary outcome measure for the trial is change from baseline in the second phase as measured by the Hamilton Depression Rating Scale. The value proposition for TC-5214 is clear.
MDD affects approximately $14.8 million adults in the U.S. alone, of which an estimated 40% or more do not respond well to first line SSRI treatment. Feedback received from thought leaders in the depression field, confirms the substantial need for new treatment options for these patients. The results from our completed Phase II TRIDMAC study validate the potential of the NNR mechanism to treat depression.
Findings published by our scientist in peer reviewed articles in the Journal of Pharmacology and Experimental Therapeutics ,and CNS Neuroscience and Therapeutics indicate TC-5214’s superior, overall preclinical profile as an anti-depressant as compared to racemic mecamylamine.
Our 2007 Type C meeting with the FDA provides guidance for later stage development planning. And our retained commercial rights and the significant market opportunity in MDD create promising partnering potential for our depression program. And consistent with our strategy, we've been actively building awareness among possible pharmaceutical partners with the resources and experience to optimize the value of this large market opportunity.
Let me now move to AZD3480 and our cognition focused collaboration with AstraZeneca. The ongoing exploratory Phase II clinical trial of AZD3480 in adults with Attention Deficit Hyperactivity Disorder or ADHD is now fully enrolled. This double blind placebo controlled three-way crossover trial is designed to evaluate the effects of two difference dose strengths of AZD3480 in approximately 24 adults with ADHD. The crossover trial design means that each subject serves as his or her own control. We expect to have top line results from the study available in the second quarter of 2009.
AZD3480 has now been evaluated in over 1300 subjects, which provides a large clinical database for analysis. We and AstraZeneca are actively engaged in consideration of 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 either or both of Alzheimer's disease and ADHD. We expect a decision from AstraZeneca in the second quarter of this year following the expected availability of top line results from the adult ADHD study.
With regard to TC-5619, our highly selective alpha7 NNR-targeted product candidate, planned for development for cognitive dysfunction in schizophrenia or potentially one or more other conditions characterized by cognitive impairment. We are in the process of preparing for Phase II. In our Phase I single rising dose and multiple rising dose trials, TC-5619 was generally well tolerated at doses at least 100 times greater than the doses that we expect to evaluate in future clinical trials.
AstraZeneca has the right to license TC-5619 following our completion of a planned Phase II clinical proof-of-concept trial. If TC-5619 achieves clinical proof-of-concept, and AstraZeneca licenses it, the pre-negotiated terms provide for AstraZeneca to pay us a $40 million fee, for us to be eligible for substantial pre-commercialization milestones, and stepped double-digit royalties on future product sales, and for AstraZeneca to assume responsibility for, and fund later stage development and commercialization.
As you know, in addition to the broad development of AZD3480 and the option mechanism to which TC-5619 is subject, our agreement with AstraZeneca also includes a multiyear, preclinical research collaboration focused on the discovery of novel compounds that act on the alpha4beta2 NNR subtype, as product candidates for cognitive disorders.
We are now in the fourth and final planned year of the research collaboration, and the progress to-date has been notable. AZD1446, which we also referred to as TC-6683 is the most advanced product candidate arising from the research collaboration.
In December 2008, AstraZeneca advanced AZD1446 into Phase I clinical development, becoming the third clinical stage product candidate tied to the collaboration and triggering a 2 million milestone payment to us. Now, in addition to our collaboration with AstraZeneca, our alliance with GlaxoSmithKline provides us a foundation to leverage our discovery and development capabilities and accelerate the progression of our pipeline in five therapeutic focus areas; pain, smoking cessation, obesity, addiction, and Parkinson's disease.
Under the terms of the alliance, for any of these areas where we achieved clinical proof of concept, and GSK exercises its licensing option, GlaxoSmithKline would assume responsibility for funding and executing later stage development and commercialization. We are eligible to receive up to $1.5 billion from GSK, 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.
TC-6499, an alpha4beta2 NNR-targeted product candidate plan for development in neuropathic pain is subject to a contingent future option of GSK under the terms of the alliance. We have completed dosing in a Phase I multiple rising dose clinical trial of TC-6499, and evaluation of data from the trial and prospects for future development of TC-6499 remain ongoing. Before turning the call over to Alan, I'd like to recognize our talented scientific staff both for their continued contributions to the expanding understanding of the role of NNRs, and for their dedication to the development of new treatments designed to exploit the NNR mechanism to treat complex diseases and improve patient’s lives.
And now let me turn the call over to Alan Musso, our Chief Financial Officer. Alan?
Thank you, Don. Let me now review with you our financial results for the fourth quarter and full year 2008. We ended 2008 with over $88 million in cash, cash equivalents and short-term investments.
During 2008, we extended our cash runway with the addition in January of $29.1 million of capital that we raised in a public offering of common stock, with increased revenue generated into our agreements with AstraZeneca and GlaxoSmithKline, and through careful management of our expenses.
As we announced in December, we expect that our current cash resources will be sufficient to meet our operating requirements at least through the first half of 2011. Between now and then, we are eligible to receive multiple milestone payments contingent on the achievement of clinical development related events, and our agreements with AstraZeneca and GlaxoSmithKline that aren’t captured in our baseline forecast and if achieved could extend our cash runway further. We continue to focus on the efficient use of capital in controlling our expenses as we execute our business plan.
Turning to our operating results, we had a net loss of $5.4 million for the fourth quarter of 2008 compared to a net loss of $7.6 million for the fourth quarter of 2007. For the full year 2008, we had a net loss of $25.7 million, compared to a net loss of $28.1 million for 2007.
For the fourth quarter of 2008, our net operating revenues were $6.5 million, compared to $3.6 million for the fourth quarter of 2007. The increase was primarily due to an additional $3.2 million of milestones and license fees from collaborations, which resulted primarily from a $2 million payment received from AstraZeneca upon initiation of Phase I clinical development of AZD1446 and $1 million in aggregate payments received from GlaxoSmithKline upon the achievement of milestone events related to progress in our smoking cessation and pain programs.
The higher milestones and license fee revenues were partially offset by a decrease of $374,000 in collaboration, research and development revenue. For the full year 2008, our net operating revenues were $20.1 million compared to $11.6 million for 2007. This increase was principally due to an additional $6.6 million of milestones and license fees from collaboration, which reflects $3.7 million in aggregate payments received upon the achievement of milestone events under our agreements with AstraZeneca and GlaxoSmithKline and recognition of additional $2.9 million of deferred license fees from payments received during 2007 from GlaxoSmithKline and AstraZeneca.
The higher net operating revenues were also attributable to an increase of $1.7 million in collaboration research and development revenue. Our research and development expenses totaled $10.7 million for the fourth quarter of 2008, compared to $9.9 million for the fourth quarter 2007. The largest contributor to the higher research and development expenses was an increase of $1.5 million in salary and benefit expenses, temporary personnel, supply and infrastructure costs associated with increased activity in the programs in the therapeutic focus areas of the alliance with GlaxoSmithKline and with the progression of our clinical stage programs. These increases were partially offset by a decrease of $904,000 in costs for third-party research and development services incurred for clinical-stage product candidates.
For the fourth quarter 2008, these third-party costs totaled $2.9 million and were incurred principally for TC-5214, TC-5619 and TC-6499. For the full year of 2008, our research and development expenses totaled $41 million compared to $34.6 million for 2007. The higher research and development expenses were principally due to an increase of $4.3 million in salary and benefit expenses, temporary personnel, fine infrastructure costs and an increase of $2.1 million in cost for third-party preclinical research and development services. Our general and administrative expenses were $1.5 million for the fourth quarter of 2008, compared to $2.1 million for the fourth quarter of 2007.
The lower general and administrative expenses were principally attributable to reduction of $319,000 employee bonuses. For the full year 2008, general and administrative expenses were 6.5 million compared to 8 million for 2007. The decrease was primarily attributable to reductions of $627,000 in employee bonuses and $967,000 in stock-based compensation expense.
Our net interest income was $419,000 for the fourth quarter of 2008 compared to $1 million for the fourth quarter of 2007. And for the full year 2008, net interest income was $2.5 million compared to $3.7 million for 2007. The decrease for both 2008 periods was principally attributable to lower short-term interest rates, and increased indebtedness under loan facilities, used to finance laboratory equipment, furnishings, software and other fixed assets.
Turning now to our guidance for 2009, based on our current operating plans, and our existing alliances with GlaxoSmithKline and collaboration with AstraZeneca, we expect that for the year-ending December 31, 2009, our net operating revenues will be in the range of $14 million to $16 million and our operating expenses will be in the range of $46 million to $50 million. And our cash, cash equivalents and short-term investments balance will be at least $54 million at December 31, 2009.
Now let me turn the call back over to Don.
Thanks, Alan. In summary, as we continue to execute our business plan in this challenging economic and financial environment, we believe that with over $88 million in cash at year-end, a diverse product pipeline, a dedicated and productive workforce and alliances with two leading global pharmaceutical companies, we are well positioned for future success.
Thanks to everyone, again, for joining us on today's call. We would be happy to take any questions you may have.
(Operator Instructions). And our first question comes from the line of Terence Flynn with Lazard Capital Markets. Please proceed sir.
Terence Flynn – Lazard Capital Markets
Hi, good afternoon. Thanks for taking the questions. Just wondering around some of the start of these Phase II trials for 5619 and 6499. Just wondering, 5619 if you could give us anymore insight into what's kind of holding up the start of that trial. I think you guys have previously said year-end ‘08 was a target and then with respect to 6499, just wondering if the recent setback with the NeuroSearch compound is having any impact on your thoughts about design of that study? Thanks a lot.
I think the timing had been pushed into, the start of Phase II had been pushed into the beginning of 2009 because of just development things that had happened along the way. It was unrelated to the recent report out on ABT-894. In addition, though we've run two big trials with 3480 in Alzheimer's disease, as well as, in cognitive dysfunction and schizophrenia and AstraZeneca has been studying an Alpha7 compound, AZD-0328. So, with all of those data coming in and being available, we have been looking at those and spending time in first quarter working through that. But we had been planning for quite sometime, I think in our last couple of conference calls, reporting that we would start Phase II, around the second quarter of 2009. So, we're on track for that. We do have the advantage of the learning now, in the trials that we've done, and we're very fortunate to have a very safe Alpha7 compound and well tolerated with over 100-fold therapeutic index based on the preclinical data. So, we're excited about the compound. We want to make sure that we design the Phase II trials in such a way that we can tease out the Alpha7 effect and we are really looking forward to getting them started.
Terence Flynn – Lazard Capital Markets
Okay, great and then the start of both of those Phase IIs with 5619 and 6499, is reflected in the guidance you gave today?
Terence Flynn - Lazard Capital Markets
Okay. Thanks a lot, guys.
And our next question comes from the line of Bret Holley with Oppenheimer. Please proceed sir.
[Matt Lowe] – Oppenheimer
Hi, this is actually [Matt Lowe] in for Bret. I was just wondering if you could speak to the market potentials specifically for an adult ADHD drug both in terms of the number of patients in the U.S. and outside the U.S.? And I guess how you kind of see this evolving overtime?
Well, it's an emerging market and it has been difficult to tease out the adult ADHD market completely, because they are captured in a lot of [adult] ADHD in general, but I think there is a sense that as the pediatric population or adolescent population ages that many of those patients will continue on ADHD therapy and as the awareness of course has spread, there are more and more adults choosing to seek medication for their inability to focus. We don’t have specific numbers right now. But we know that over the course of our collaboration with AstraZeneca, where we started that collaboration in December of 2005, they’ve had increasing interest in this area and in addition we know that Abbott has continued to look at alpha4beta2 compounds in ADHD, specifically adult ADHD as well. And just to remind people, Duke ran a trial many years ago now using the nicotine patch in adult ADD and had a statistically significant improvement in a double-blind placebo-controlled trial with nicotine, that Conners ran with 11. So, we’re excited about the area. We are hopeful that this trial that we’re running now will prove positive and that we will have a good strong developing commercial opportunity around 3480.
[Matt Lowe] – Oppenheimer
Okay, that’s great. Thank you.
And our next question comes from the line of Jon Lecroy with Natixis. Please proceed sir.
Jon Lecroy – Natixis Bleichroeder
Yeah, thanks. Can you talk a little bit about 5214? If that trial comes out successful and you are unable to partner it in the near-term, what would be your development path for that?
That’s a good question Jon. As you know we mentioned that we had a Type C meeting in August of 2007, and in that meeting with the FDA, we got guidance from them on what a Phase III development program could look like, so we are looking at being able to study [allcomers] in the sense that we would be looking at people with depression that weren’t responding well to a variety of therapies that are on the market, doing an add-on trial, expanding the patient database and we are looking at doing three trials in Phase III. Our expectation is with the interest and with the introduction of Abilify now as an augmentation for major depressive disorder that there is significant interest out there. We have had positive signals from companies in response to our TRIDMAC data on mecamylamine where we hit the primary endpoint on an improvement in the Hamilton Depression Scale versus placebo. And hit all five secondary endpoints. So, we feel like strength of the data, the movement of the market in that direction, the publication of the STAR*D results from The National Institute of Mental Health showing that a full two-thirds of people still have depressive symptoms after their first course of therapy that we should have support as we move into Phase III. Naturally if that doesn't come to fruition, then we'll be looking at our programs and prioritizing our activities to be able to advance an important opportunity.
Jon Lecroy – Natixis
All right, thank you.
(Operator Instructions) And our next question comes from the line of Kathleen Carey with Bay Point & Bass Institute . Please proceed ma'am.
Kathleen Carey – [Bay Point & Bass Institute]
Hi guys. My question is regarding the AstraZeneca decision. And my question is if you plan to move forward why have you suspended all the Phase I clinical trials?
That's a good question. They had observed a significant adverse event in one of those drug-drug interaction studies in healthy volunteers, and suspended those trials, so that they could sort through that. They have sorted through it and have now made a decision to restart those trials. If you look on clinicaltrials.gov, there is a statement on there about that and we’ve just gotten a word from AstraZeneca that they're prepared to restart those trials.
Kathleen Carey – [Bay Point & Bass Institute]
Great, thank you.
And there are no further questions. At this time I would like to turn the call back over to Dr. deBethizy for closing remarks.
Thank you, [Latrise]. I want to thank everybody for joining us on the call and thank everybody for their continued interest in Targacept. Thanks very much.
Thank you for your participation in today's conference. This concludes the presentation. You may now disconnect. Have a great day.
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