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Executives

James Manuso - President and Chief Executive Officer

Michael Molkentin - Chief Financial Officer

Greg Berk - Chief Medical Officer

Dr. David Bearss - Chief Science Officer

Timothy Enns - SVP, Corporate Communications and Business Development

Analysts

Elemer Piros - Rodman & Renshaw LLC

Matthew Osborne - Lazard Asset Management

SuperGen, Inc. (SUPG) Q4 2008 Earnings Call Transcript March 2, 2009 4:30 PM ET

Operator

Good day, ladies and gentlemen, and welcome to the fourth quarter 2008 SuperGen earnings conference call. My name is Missal 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 toward the end of this conference. (Operator instructions) As a reminder, this conference is being recorded for replay purposes.

I would now like to turn the call over to Mr. Tim Enns, Senior Vice President of Corporate Communications and Business Development. Please proceed, sir.

Timothy Enns

Thank you, Operator. Good afternoon and thank you for joining us today to discuss SuperGen's 2008 fourth quarter and annual financial results. With me today are Dr. James Manuso, President and Chief Executive Officer; Michael Molkentin, Chief Financial Officer; Dr. Greg Berk, Chief Medical Officer; and Dr. David Bearss, Chief Science Officer.

In a few moments, Jim Manuso and Michael Molkentin will deliver remarks on the 2008 fourth quarter and annual financial results and provide a summary of our business outlook. After our prepared comments, we will open the line for questions. Earlier today, we have issued a press release about our financial results. A copy of the press release is available on the Investor Relations section of our website at www.SuperGen.com. In addition, this call is being webcast and may be accessed via the Investor Relations section of our website. A webcast replay will be available for 90 days.

During the call, we will make projections and forward-looking statements that are based on management's expectations. Actual results may differ materially from these forecasts due to various factors. There are significant risks and uncertainties in biotechnology research and development. There can be no guarantee that our products or product candidates will progress pre-clinically or clinical trials as we expect or they will ultimately obtain approvals for the indications that we seek. Moreover, if the products or product candidates are approved in the future, we cannot guarantee that they will become commercially successful.

The Company's results may also be affected by such factors as competitive developments, launches of new products, the timing of anticipated regulatory approvals, other regulatory actions or patent disputes and litigation. For additional information and discussion concerning the risk factors that affect the Company's business, please refer to the Company's filings with the Securities and Exchange Commission including reports on our most recently filed Form 10-K and Form 10-Q. The Company undertakes no duty to update forward-looking statements.

For those of you interested to learning more about SuperGen, we will host our Fourth Annual Analyst Day on April 14th from 10 to 12 in New York. This event will be webcast live and archived on our website for your review.

I will now turn the call over to Dr. James Manuso, who will provide highlights of our accomplishments during the 2008 fourth quarter and fiscal year. Jim?

James Manuso

Thanks very much, Tim. Good afternoon and thank you for joining us today for SuperGen's 2008 fourth quarter results, 2008 annual financial results and 2009 guidance conference call. I am pleased to report that 2008 proved to be a productive and financially successful year for SuperGen. The Company recognized total Dacogen royalty revenues of more than $38 million, representing a 72% increase over 2007. This performance exceeded our last reported guidance, our royalty and licensing revenues combined with strict financial oversight enabled us to end 2008 with approximately $88 million in unrestricted cash, cash equivalent and current and noncurrent marketable securities. This reflects a year-over-year decrease in net cash, cash equivalents and marketable securities of only $3 million.

We will continue our fiscally prudent operating tenets during 2009. We now project an annual net cash burn of less than $5 million for 2009. From a financial perspective, SuperGen will continue to operate in a manner consistent with past performance specifically we have been debt-free since 2005 and currently intend to remain so. Based on our stated strategic plan, it is not our intention nor is it our need to raise money in the capital market during 2009.

As we entered 2009, we took certain actions to better position the Company financially and operationally to more effectively advance our drug development efforts. One action included a reduction enforced that decreased total personnel by approximately 8%. This measure is expected to reduce annual operating costs by up to $1.2 million.

During 2008, we advanced MP-470, our DNA repair inhibitor in Phase I and Phase Ib trials in the clinic. The FDA cleared the IND for SGI-1776, our first in class PIM kinase inhibitor. Patients are now being screened to receive SGI-1776. This is the first targeted pan-PIM kinase inhibitor to enter the clinic worldwide.

Our discovery operation has been prolific during 2008. We advanced the preclinical development of a number of noble drug leads and candidates, all of which are proprietary to our Company. Our ability to model unique molecular targets and design proprietary drug leads against these targets has been augmented during 2008. We expect to build upon this progress during 2009 and realize further our Company's potential to emerge as the leader in the discovery and development of targeted small molecule drugs for cancer.

During the year, we restructured our officer team by promoting Dr. David Bearss from Vice President of Drug Discovery to Chief Scientific Officer. This move brings into parity discovery and preclinical development with our clinical development and regulatory affairs operations headed by Dr. Gregory Berk, our Chief Medical Officer. Our focus on discovery and development is intended to maximize the value of each program or product at every stage of developments.

On the business development front, partnering remains a key goal. Last year, we made a strategic decision to not take products into Phase III trials without a partner. We believe this decision will lower our product development costs and risks. To date, our revenues had been almost exclusively comprised of royalties from worldwide Dacogen sales. This source of revenues represents what might be referred to as a variable annuity. We are pleased with the 2008 Dacogen sales and marketing performance of our partners, Eisai and Johnson & Johnson. Eisai, a Japanese multinational pharmaceutical company conduct sales, marketing and clinical and regulatory development of Dacogen in North America and Janssen-Cilag, a Johnson & Johnson company is responsible for sales, marketing and clinical and regulatory development of Dacogen in the rest of the world.

Dacogen is now being assessed in more than 30 clinical trials around the world. Dacogen is an extremely important drug for our partners. Eisai is highly committed to the Dacogen franchise. Dacogen sales represent more than 25% of Eisai's total cancer drug sales. Indeed, Eisai's 2011 guidance for North American Dacogen sales is in excess of $300 million. To promote this outcome, Eisai has committed more than 400 people to the US commercial oncology effort. In addition, Eisai is advancing is registration of Phase III trial examining the safety and efficacy of Dacogen in acute myelogenous leukemia or AML.

Eisai has also planned for a supplemental new drug application or sNDA to be filed with the FDA. The purpose of this proposed filing is to expand the current Dacogen label to include a 5-day dosing schedule. In addition, Eisai has announced its plan to commence a head-to-head clinical trial comparing Dacogen to Vidaza in advanced myelodysplastic syndrome or MDS patients later this year.

Finally, Eisai management expects that the number of Dacogen cycles per patient will continue to increase from an average of five cycles to eight cycles. Outside of North American, Johnson & Johnson Janssen-Cilag operating company has registered Dacogen for sales authorization in more than 30 countries. SuperGen is currently receiving royalties on Dacogen sales from more than 15 countries the United States.

Given the enhanced commercial, clinical and regulatory efforts of Eisai and Janssen-Cilag, Dacogen is expected to remain a significant therapeutic deployed in the treatment of MDS patients globally. We anticipate that substantial Dacogen royalty revenues will continue to offset costs associated with our drug discovery and development programs.

Before turning the call over to Michael Molkentin for a discussion of our financial results, I would like to provide a brief update on the development of our lead drug candidates. During the fourth quarter, we filed an investigational new drug application or IND for SGI-1776, a pan-PIM kinase inhibator. The IND was cleared by FDA late last year. Clinical sites are now screening prostate and lymphoma patients for inclusion in the trial.

SGI-1776 is the first of SuperGen's clinical stage drugs to derive fully from our proprietary CLIMB drug-discovery process. SGI-1776 is our Company's initial first in class drug. As I stated earlier, it will be the first PIM kinase inhibitor to enter the clinic. PIM is a noble and critical target for cancer drug development as it is involved in a variety of processes known to be important for tumor cell survival including suppression of programmed cell death or apoptosis, regulation of transcription, regulation of cell cycle progression and drug resistance.

The initial Phase I clinical trial of SGI-1776 will focus on patients with advance prostate cancer and refractory lymphomas. Diseases where PIM kinase is are heavily over expressed. This trial is intended to establish a maximum tolerated dose for the drug. Upon establishing that dose and based on our preclinical data, it is our intention to commence a Phase I trial in refractory leukemias where PIM plays a major role in drug resistance and where preclinical data are most compelling.

Our other product in the clinic in a Phase Ib trial combination trial is MP-470, a DNA repair suppressor. Preliminary clinical data were reported at several scientific conferences during 2008. The data demonstrated the drugs encouraging safety profile with no apparent additive toxicities on administered and combination with a variety of chemotherapy regiment. The data also revealed preliminary activity signals in patients with neuroendocrine and small-cell lung cancers. This year, we plan to release additional data on the safety and activity of MP-470 in combination with platinum-based therapies and data on the drugs mechanism of action. We will also announce data on an improved formulation of MP-470 that increases the drug's bioavailability.

Next in our development pipeline is S-110, a second generation DNA hypomethylating agent that is a pro-drug of decitabine. To date, it has been demonstrated at the preclinical stage that S-110 can do everything that decitabine, the active chemical mode in Dacogen and Vidaza can do. Although the hypomethylators Dacogen and Vidaza have had a significant impact on the treatment of MDS, neither of these agents has demonstrated methylation reversal in solid tumors. We are completing advance preclinical work to explicate more fully the role of S-110 in solid tumors.

A recent addition to our pipeline is SGI-1252, a preclinical stage orally bioavailable JAK2 inhibitor. Notably, SGI-1252 selectively inhibits JAK2 and the V617F mutant of JAK2 without toxicity inducing activity against JAK3. This unique profile produces [cytokine] activity that might have significant applications outside of the anticancer space, most notably in a variety of inflammatory diseases.

Given the number of JAK2 inhibitors currently in development, we are seeking a commercial partner for the further development of SGI-1252. With the respect to the ownership of our drugs, remember, we own outright Dacogen and all of the drugs in our pipeline excluding MP-470 and MP-529. Although these latter two drugs were in license, we would own the licensee only a few nonmaterial post Phase III success-based milestones in less than 1% royalty on future sales.

As indicated previously, to balance risk and increase value, SuperGen strategy is to discover and develop compounds and drugs that can be out licensed or otherwise monetize at different stages of development. To conserve cash and realize further, the earlier value of our portfolio, our strategy calls for taking into Phase III trials only those drugs that are partnered. These measures will help to control costs and underwrite the significant expenses of drug development.

At this time, I will turn the call over to Michael Molkentin, our Chief Financial Officer. Michael will provide details on our 2008 financial results and annual financial guidance for 2009. Michael?

Michael Molkentin

Thank you, Jim. Total revenues from the 2008 fourth quarter were $11.9 million, an increase of approximately 53% when compared with $7.8 million for the same prior year period. Total revenues consist entirely of royalty revenue for both periods and are recognized on a cash basis when received.

Excluding gain on sale of products, total costs and operating expenses for the 2008 fourth quarter was $15.6 million compared with $9.4 million for the same prior year period. Primary reasons for the increase in total costs and operating expenses were higher research and development cost related to product development activity including clinical operations and a $5.2 million charge relating to acquired in-process research and development cost resulting from a milestone payment to the former stockholders of Montigen Pharmaceuticals.

A milestone payment consisted of $2.8 million in cash and the issuance of approximately $2.4 million in shares of our common stock offset in part by a reduction in general and administrative expenses due to the cessation of our European operations in a previous period and reduction in stock-based compensation expense. Stock-based compensation expense was $758,000 for the 2008 fourth quarter compared with $1.1 million for the same prior year period.

The $5.2 million cash and equity payment to the former Montigen stockholders represents the second to last milestone payment due on this acquisition. Going forward, we will potentially owe a final milestone payment of $6.8 million upon the filing of an NDA relating to a drug emanating from the acquired technology. The gain on sale of products for the 2008 fourth quarter was $676,000 compared with $6 million for the same prior year period. The fourth quarter gain relates to the receipt of an additional milestone payment and the reduction in the remaining estimated price protection liability resulting from the prior sale of worldwide rights for Nipent to Mayne Pharma while the reported gain the prior year fourth quarter reflects receipt of other milestone payments from this transaction.

The Company reported a net loss for the 2008 fourth quarter of $2.6 million or $0.04 per share compared with net income of $5.1 million or $0.09 per share for the same prior year period. Our annual results are summarized as follows; total revenues for 2008 were $38.4 million compared with $23 million for the same prior year period. Royalty revenue for 2008 was $38.4 million, an increase of approximately 72% when compared with $22.3 million for the same prior year period. There was no net product revenue for 2008 compared with $621,000 in the prior year. The decrease in net product revenue for 2008 is due to the prior sale of Nipent to Mayne Pharma.

Excluding gain on sale of products, total costs and operating expenses for 2008 were $49 million compared with $47.1 million for the same prior year period. The 2008's increase in total costs and operating expenses relate to higher research and development cost and payment to severance cost related to the closure of our European operation, partially offset by lower acquired in-process research and development cost and overall reduction in general and administrative expenses including the elimination of ongoing operating cost related to the closure of our European operations and reduced stock-based compensation expense.

Stock-based compensation expense was $2.8 million for 2008 compared with $4.3 million in the prior year. The gain on sale of products for 2008 was $2.2 million compared with $33.7 million for the same prior year period. The gain on sale of products for 2008 related to the receipt of the additional milestone and a reduction in the estimated remaining protection liability resulting from the sale of Nipent to Mayne Pharma. The gain on sale of products in 2007 reflects primarily the initial recognition of proceeds earned and other additional milestone payments received during the period from the sale to Mayne Pharma.

The Company reported a net loss for 2008 of $9.1 million or $0.16 per share compared with net income of $13.1 million or $0.23 per share for the same prior year period. The net loss for 2008 includes an impairment charge of $3.1 million that reflects in other than temporary declining value of equity investments compared to a similar impairment charge of $65,000 in the prior year. The Company had unrestricted cash, cash equivalent and current and noncurrent marketable securities of $88.3 million at December 31st, 2008 compared to $90.8 million at December 31st, 2007.

The initial financial guidance for 2009 includes the following; royalty revenue is expected to increase by up to 10% from the prior year to a range from $38 million to $42 million. Research and development expenses are expected to increase slightly from the prior year to a range from $37 million to $39 million. The growth in expenses are influenced by increasing cost related to our clinical trial programs including cost from MP-470 and SGI-1776, ongoing product development efforts and targeted additional investment in certain research and development areas.

General and administrative expenses are expected to decrease from the prior year to approximately $10.5 million. An additional milestone payment or gain on sale of products in the amount of $5,000 related to the prior sale of Nipent to Mayne Pharma is also expected. Net loss versus loss from operations is expected to be in a range from $6 million to $8 million. Included in total operating expenses are noncash stock-based compensation expenses estimated at $3 million.

Excluding the noncash expenses from the 2009 guidance, net loss results in an estimated basic non-GAAP annual cash burn in a range from $3 million to $5 million and lastly, average annual shares outstanding are expected to be approximately $59 million common shares.

This concludes the review of our financial results for 2008 and annual financial guidance for 2009. I would now turn the call back to Dr. Manuso for closing remarks.

James Manuso

Thank you very much, Michael. These are hard times, challenging times for our country and certainly for our industry. This is especially so for discovery-based development companies, companies that require precious cash to continue to serve as the wellspring of the next generation of therapeutics for an array of diseases. As many of you know, more than half of our nation's biotech companies have less than one year of cash and more than 25% have less than six months of cash remaining.

External forces have caused the number of the world's biotech companies to shut down all together or to relinquish discovery research in order to fund the development of later stage drugs in their pipelines. This exodus from discovery at the time when large pharmaceutical companies face patent clips and a growing need to broaden pipelines provides unique opportunities for our Company.

Our inherent strength will put us in a unique position to realize value from these opportunities. SuperGen's current financial status, its technological prowess, the superb team of people which we are privileged to have and product pipeline are not mistakes. They derive from the painstaking execution of our long-term strategy. It gives our intention to continue to build and grow our Company so we emerge in the year's ahead as a singular leader in the efficient discovery and clever development of noble small molecule therapeutics that are valued highly in the market place. We are extremely fortunate to be in our current position.

We thank you for your patient shareholdings and interest in SuperGen and we look forward to reporting to you our progress during 2009. I also want to thank our fabulous, dedicated team for making possible the many accomplishments we have reported to you today.

With that, Dr. David Bearss and Dr. Greg Berk, Michael Molkentin, Timothy Enns and I are now ready to answer you questions. Operator, we will take questions at this time please.

Question-and-Answer Session

Operator

(Operator Instruction) Your first question comes from the line of Elemer Piros - Rodman & Renshaw LLC.

Elemer Piros - Rodman & Renshaw LLC

What a relief to be in such a strong financial position.

James Manuso

It is remarkable, but planned.

Elemer Piros - Rodman & Renshaw LLC

My first question is related to MP-470, Jim. Could you share us a timeline or particular medical conferences than you would disclose additional data?

James Manuso

By all means, I would like pass that to Greg Berk. Greg?

Gregory Berk

Yes, Elemer, we will have data on MP-470 from the clinical trials at three upcoming conferences. The first one will be the TAT, Targeted Anti Therapy Conference in Amsterdam in two weeks. We will have data next month at ACR then we will have data at the ESMO Lung Conference which is the last weekend of April. So, three meetings coming up which we all have a presentations at.

Regarding your question regarding timeline, our plan as you know, we are in our Phase Ib combination trial. We have recently amended the protocol to include two more biopsies specifically to look for some of the biomarkers of interest which get to the mechanism of action of the drug. We plan to go back into the clinic with the new formulation as well some time later in the year hopefully with the goal of being in Phase II some time the first half of 2010.

Elemer Piros - Rodman & Renshaw LLC

And what rate did you improve the formulation?

Gregory Berk

Improved bioavailability.

Elemer Piros - Rodman & Renshaw LLC

Improved bioavailability, okay. The other question was more of a strategic in nature, what would be, for each program and if you wanted to include all of the programs that would be available for partnering, what would be the right development stage than you would be ready to partner those programs?

James Manuso

Well, it is certainly our belief that MP-470 is of increasing interest to potential partners in view of data that will be presented at TAT, ACR and ESMO on the one hand. What we have discovered is that there is a great deal of interest in 1776 although it has not yet been first in map and that is expected as I indicated very shortly because they are currently screening patients for that.

The other products are in preclinical stages and 1252, our JAK2 inhibitor, it is not our intention to take that into the clinic and rather we are exploring the potential of the anti-inflammatory indications that would be of interest potentially to a company outside of the anti-cancer space and in addition, there have been expressions of interest on the parts of larger companies with respect to the potential deployment of our CLIMB discovery process in areas where we are already working.

So, I have to say Ele in some that regardless of the stage there are varying levels of interest and because it is our intention to monetize out license otherwise I get some traction with these compounds that were amenable to discussions and Tim is Head of Business Development. Tim, would you have any comments to add?

Timothy Enns

Ele, just a quick little follow up similar to what Dr. Manuso said is that the proven principle for every program changes with the target and the information that is available publicly and we are generating and so it is not like some companies will say they will take every product to Phase II and then partner. That is not our approach. Our approach is to push every product towards proven principles and look for the return that would be appropriate for achieving that and so with each of our programs, we are striving to hit that point as soon as possible and directed towards being able to deliver a product to a partner and that changes with each program we have.

James Manuso

And Ele, just to put this in the financial context, as Michael pointed out, it is our intention to, in effect, end 2009 with close to the amount of money that we began 2009 with and thankfully, that is a result of the royalties from Dacogen. Now, we also fully intend to execute on our partnering strategy which could change even more favorably the picture that we painted for you.

Elemer Piros - Rodman & Renshaw LLC

Do you believe that because that we could focus on the first half 2009 event or focus probably even less of an advance stage?

James Manuso

It is very difficult to prognosticate in that regard, not truly like every other company, we continue to entertain discussions and yet, we also want the best deals for everything that we have. Unfortunately, we have interest.

Elemer Piros - Rodman & Renshaw LLC

Make sense and you have the staying power obviously.

James Manuso

Indeed, we do. Thank you.

Operator

(Operator's instruction) Your next question comes from the line of Matt Osborne - Lazard Asset Management.

Matthew Osborne - Lazard Asset Management

Just a question on S-110, if you can tell us what the rate limiting step is to get that into the clinic if there is a toxicity study that is ongoing relative to decitabine?

James Manuso

Well, appreciate that. S-110 is a dinucleotide that incorporates decitabine and what we have discovered thus far is that under the present confirmation of S-110, it does everything that decitabine does. It appears to be fast acting and potent and what we are doing however is exploring how we might engineer the drug in such a manner as to also have it impact solid tumors that would make a big difference and a major step forward compared to decitabine and it is two current formulations. So we are, as you know we have done a fair amount of work to include animal work on S-110 and we are advancing that further at this point.

I do not have an exact timeline for you but what we can say is that a pretty wide variety of clinical researchers have expressed interest in working with S-110 and naturally we want to assure that it is properly constellated in order to do what we would like it to do namely to have an impact on solid tumors. Greg, do you have any comments to add to that?

Gregory Berk

No, I think you pretty much covered it.

Operator

At this time, there are no additional questions in the queue. I will now turn the call back to Dr. Manuso for any further remarks.

James Manuso

Thank you very much for joining us today. If there are no further questions, we will end here and certainly invite you to examine our website, follow up with us independently. We are always happy to entertain your questions. Thank you very much.

Operator

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

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Source: SuperGen, Inc. Q4 2008 Earnings Call Transcript
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