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Executives

Alexis Borisy - Chief Executive Officer and President

Robert Forrester - Executive Vice President and Chief Financial Officer

Justin Renz - Vice President, Finance

Gina Nugent - Vice President, Corporate Communications and Investor Relations

Analysts

Gregory Wade - Wedbush Morgan Securities

Simos Simeonidis - Rodman & Renshaw

Matthew Osborne - Lazard Capital Markets

David D. Miller - Biotech Stock Research

Kenneth Hershberg - Hershberg Capital

CombinatoRx, Inc., (CRXX) Q4 2008 Earnings Call March 4, 2009 8:30 AM ET

Operator

(Operator Instructions). Please be advised that this call is being taped at the company’s request. At this time, I would like to introduce your host for today’s call, Gina Nugent, Vice President of Investment and Corporate Communications at CombinatoRx.

Gina Nugent

Good morning everyone and welcome to the CombinatoRx fourth quarter and year end 2008 conference call in which we will provide a corporate update including fourth quarter and year end 2008 financial results and upcoming milestones. I’m Gina Nugent, Investor Relations and Corporate Communications at CombinatoRx, and with me today is Alexis Borisy, President and CEO of CombinatoRx; Robert Forrester, Executive Vice President and Chief Financial Officer; and Justin Renz, Vice President of Finance. The agenda for the call is as follows; Alexis will provide an overview of 2008 and recent accomplishments and Robert will run through fourth quarter and full year 2008 financial results. After that, the team will be available to answer questions during the Q&A session.

Before we begin, let me remind everyone that our statements today about our product candidates’ goals, financial projection, business development strategy, potential transactions, and business prospects and plans are all forward-looking statements under the Securities Laws. These statements are made based on our current assumptions, expectations or beliefs and are subject to a number of risks and uncertainties that could cause the company’s actual results to differ materially from these statements.

Our assumptions, expectations, or beliefs may change and the company undertakes no obligation to update or revise any such forward-looking statements to reflect subsequent events or circumstances. In addition, the risks underlying these statements are described in the Risk Factors section of the report we filed with the SEC.

I will now turn the call over to Alexis.

Alexis Borisy

Good morning everyone. The year 2008 was clearly a disappointing year, and the company stands today not as advanced in its development as we would like to be. However, we continue to believe in our core strengths and our ability to create value going forward, and that while we certainly had setbacks in 2008, we should not overlook the accomplishments which provide evidence of the fundamental value of the CombinatoRx approach.

We have also restructured the company to focus on our core strengths and believe we have created a capital efficient and value creating path forward. Our focus is on our unique drug discovery technology, on the synergy and selectivities that we find, synergy allowing us to have substantial degree of activity and the context specific selectivity which gives you the activity where you wanted and not where you don’t, which we think can provide meaningful advances in therapeutics.

We will continue with our existing collaborations as appropriate and will sign new collaborations. We will have an increased emphasis on using new chemical entities in our product assets going forward, and with the restructuring that we have cash through 2012.

Allow me to look at some of our accomplishments in 2008 and recently that provide evidence of the fundamental value of the CombinatoRx approach. Let me start with the results of the Synavive, COMET-1, phase II knee osteoarthritis trial that we believe provide important clinical translational evidence for Synavive, the dissociated glucocorticoid candidate.

As a reminder Synavive, also known as CRx-102 is a synergistic combination drug candidate containing a very low dose of the glucocorticoid prednisolone and the cardiovascular agent, dipyridamole. It has a novel multi-target mechanism of action that is targeted to synergistically and context specifically synergistically, so therefore selectively amplify the beneficial anti-inflammatory glucocorticoid activity without amplifying the adverse events.

COMET-1 was designed to evaluate the safety and efficacy of Synavive in subject with symptomatic knee osteoarthritis. The modified intent-to-treat analysis of this study, the pre-specified analysis of this study provides evidence of a strong and statistically significant clinical benefit of high-dose Synavive, 2.7 mg prednisolone combined with 360 mg of dipyridamole and WOMAC stiffness and physical function as well as WOMAC pain.

The Synavive provided treatment benefits as great as 19.5 mm compared to placebo and 8 mm more compared to prednisolone alone in these efficacy measures. Just as context setting there, 10 mm on that order of magnitude is generally considered to be clinically meaningful so that you can see that the drug has a clinically meaningful improvement over the steroid alone and a very substantial improvement compared to placebo. We believe that these effects are at a meaningful clinical level and beyond what you’d expect to see with many current osteoarthritis therapies.

In addition, in another pre-specified analysis, a strong level of effect was observed for those patients in the study who also entered the study experiencing significant hand pain. Where we saw here a clear distinction between Synavive with approximately a 45% reduction in that hand pain compared to a 26% reduction for the glucocorticoid alone or 23% with placebo. These results substantiate the activity observed in our earlier clinical study of Synavive in subjects with hand OA and that were pleased to see the consistency from that phase IIa hand OA study to this pre-specified sub-study in hand pain in this phase II.

Synavive was generally well tolerated and there were no study drug-related serious adverse events reported. The most commonly reported adverse event was headache. At 4%, the rate of drop-out from headache was evenly distributed across all active treatment arms.

Furthermore, as evidenced not only of the translation of the synergy but equally as important, the translation of the selectivity of the combination effect, no evidence of glucocorticoid related toxicities was observed. When we shared this information with key opinion leaders, they shared our interest in Synavive potential in osteoarthritis of both the hand and of the knee. The next step for Synavive is the ongoing one-year safety extension study which will provide continued in-depth analysis of the long-term safety of Synavive, particularly with regard to the effects of the very low dose of prednisolone that it contains.

Further, pre-clinical evidence of the synergy and selectivity of Synavive is now newly published in arthritis research and therapy on our systems biology based strategy that selectively amplifies the anti-inflammatory activity of low-dose glucocorticoids without modulation of pathways associated with glucocorticoid toxicity, further demonstrating the utility of our multi-targeted approach, our systems approach to identify novel therapeutics that are pathway or multi-target focused.

Another important example of our approach to synergy and selectivity is our oncology research efforts in the field of B-cell malignancies, such as multiple myeloma, which is a good example of our ability to identify unexpected novel drug targets, their underlying synergistic and selective biology, and the potential for them as product candidates.

Important pre-clinical data was presented during the meeting of the American Society of Hematology Conference in December including a review of CombinatoRx beta-2 adrenergic receptor agonism and adenosine A2A receptor programs. These programs represent novel, selective, and synergistic multiple myeloma targets that have demonstrated selective synergy with all important drug classes, both existing today and emerging, and broad activity in multiple myeloma and other B-cell malignancy tumor cell lines. These activities have translated ex-vivo in multiple myeloma and other B-cell malignancy patient tumor samples including those that are refractory to all standards of care.

This research was conducted in collaboration with renowned thought leaders in the field of multiple myeloma including the Jerome Lipper Multiple Myeloma Center at the Dana-Farber Cancer Institute in Boston and the Institute for Drug Development, Cancer Therapy, and Research Center at the University of Texas Science Center in San Antonio, and we are currently considering a clinical proof-of-concept study in this program.

In other news, as we do look at the wrap-up from 2008, we completed a proof-of-concept trial with CRx-197 in psoriasis in which all treatment and vehicle arms demonstrated similar activity on the modified PASI scale effectively yielding no useful data. Again to be clear, in this study we had both CRx-197 as well as calcitriol as a positive control as well as a vehicle-alone control, and all those arms including the vehicle-alone ended with the same result on the modified PASI scale, which as I said, effectively yields no useful data from this study.

Previously we had successfully completed a phase I study of CRx-197 in healthy volunteers. A phase IIa clinical trial of CRx-197 is being considered in atopic dermatitis for the second half of 2009.

In 2008, we also completed a proof-of-concept trial of CRx-191 in plaque psoriasis, which as a reminder demonstrated statistically significant combination versus part effect of CRx-191.

We published a review article in nature chemical biology demonstrating the power of the CombinatoRx CHGS technology to discover interesting new biology and mechanisms by modeling biological systems through combination chemical genetics, and we continue to leverage our unique drug discovery technology on behalf of ourselves and collaborators illustrated by the receipt of additional research funding to support our efforts to identify novel treatments for Duchenne’s muscular dystrophy.

With that review of our recent accomplishments, let me reiterate our strategy moving forward and provide directions for the year.

We restructured the company to focus on our core strengths and believe we’ve created a capital efficient and value creating path forward. Our focus is on our unique drug discovery technology, synergy, and selectivity. We will continue with existing collaborations and our aim is to sign new collaborations. We will have an increased emphasis on using new chemical entities in our product assets, and with the restructuring we have cash through 2012.

I will now turn the call over to Robert, who will briefly review the financial results for the fourth quarter and year ended 2008.

Robert Forrester

Good morning everybody. We reported revenue of $3.9 million in the fourth quarter of 2008 compared to $3 million in the fourth quarter of 2007. For the year ended December 31, 2008, revenue was $14.1 million compared to $14.9 million the same period the year before.

We had a net loss of $15.2 million for the fourth quarter of 2008. For the year ended December 31, 2008, net loss was $65.1 million or $1.87 per share compared to a net loss of $53.4 million in the year ended December 31, 2007.

Year-to-date we have incurred $5.9 million and $3.7 million of stock compensation expense and depreciation and amortization expense respectively for a total of $9.6 million in non-cash expenses.

As a result of our restructuring, we incurred a restructuring charge of $4.6 million in the fourth quarter of 2008. Our 2008 net loss excluding this restructuring charge, the stock compensation expense and depreciation and amortization expense was $51.1 million which is in line with our 2008 net loss guidance of $51 to $57 million.

As of December 31, 2008, we had restricted cash and short-term investments of $51 million. During the quarter, we repaid $5.7 million in notes payable to GE Capital. Excluding this earlier debt we are in line with our 2008 cash guidance of $56 to $62 million.

We believe that our cash balance provides sufficient cash reserves for the US operations to operate into 2012. We’re targeting a cash flow of $5 to $10 million in 2010 and beyond.

As part of our efforts to simplify our business and capital structure, as Alexis mentioned earlier in the call, we’re planning to divest on a majority-owned subsidiary CombinatoRx Singapore which was focused on infectious disease research. Discussions with our Singaporean partner to complete this divestiture and eliminate potential dilution to CombinatoRx stock orders are ongoing.

With that we’ll stop and take your questions.

Question-and-Answer Session

Operator

(Operator Instructions). Our first question comes from the line of Gregory Wade - Wedbush Morgan Securities.

Gregory Wade - Wedbush Morgan Securities

With respect to the burn guidance, $5 million to $10 million kind of a large range, if you could just provide some insight as to what the range is based upon, and then secondly, what are the deliverables expected in 2009?

Robert Forrester

The range is a little wide, $5 million to $10 million; I think as we try and get used to our new skin, we’ve obviously come down from a very significantly larger burn, and as we move from that to new environment going forward, it’s not entirely clear whether we’re near the $10 million the $5 million. It also is dependent on the success of BD, etc. So I think we feel comfortable with saying $5 million to $10 million right now, and we can give increased clarity as we progress through the year.

Alexis Borisy

With regard to the second part, for the deliverables for the year, I think as described in our comments, obviously our focus is on synergy and selectivity where continuous existing collaborations and to sign new collaborations and increased emphasis on using NCEs and our product classes and to the financial aim that Robert just described.

Operator

Our next question comes from Simos Simeonidis - Rodman & Renshaw.

Simos Simeonidis - Rodman & Renshaw

Could you give us any update or your thoughts on partnering; which compounds would you like or expect to push towards a partnership; I am assuming Synavive would be a logical choice. And also if you can give us an update on what’s going on with CRx-191; are you moving this forward to further trials? And any updates you may have on CRx-401, I know in the last press release you had said that you hadn’t seen significant data, but are you not further in developing the compound, or what’s the latest on CRx-401?

Alexis Borisy

There are a bunch of questions in there and so if I don’t hit them all, please remind me on that. So, obviously we continue on multiple conversations; we live in interesting times, I think, is a fair statement that we can all appreciate at the moment. With regard to technology deal, discussions are ongoing and we continue to be optimistic on that front. I think you asked in regard to CRx-401, and as you know the interim analysis was conducted in which the feedback was that we were unlikely to achieve statistical significance of a separation between the agents. We will have the final data in the first half of 2009, and if the data from that final analysis are different from what we saw in the interim analysis, we will obviously be reporting that.

Simos Simeonidis - Rodman & Renshaw

And then about CRx-191?

Alexis Borisy

On CRx-191, as I mentioned in the comments, that did show statistically significant combination versus the part’s data. What we’ve said in the past is that we’re waiting for the CRx-197 data. The results from the CRx-197 are obviously now in, but are basically not useful, and so do not provide any evidence or information one way or the other with regard to either CRx-197 and likewise therein to CRx-191. As you all know, the company has many product assets that could be of substantial value; however, in bringing the company down from a restructuring perspective to a burn on the aiming to get down to the $5 million to $10 million range, we obviously have to be very careful and judicious about the product investments that we make going forward.

Simos Simeonidis - Rodman & Renshaw

Also, I was going to ask whether you are able to provide any guidance in terms of revenue for this year; I know it might be tough to do so, but are you able to give us any guidance on what to expect on that end?

Robert Forrester

That’s a great question, that’s one that we wrestle with the whole time too. It’s a bit premature to give guidance on revenues with a couple of things that are bubbling along that would make such a big difference up or down. So, as I said, it’s premature.

Simos Simeonidis - Rodman & Renshaw

Rob, another question for you. Are the restructuring charges that you incurred in 4Q the last ones we’ll see based on the two rounds of layoffs you had in November or could we expect to see some more charges in Q1?

Robert Forrester

I think you’ll see some more charges in Q1.

Simos Simeonidis - Rodman & Renshaw

Finally, and I’ll jump back in the queue, one of the positives, I guess, that came out of the fourth quarter in my view is that you had two of your long-term investors that are seasoned biotech people and know the space really well that increased their stake in the company from about 11% to 42%. So, I think that’s a positive because it’s a nod of confidence for the company. Given the fact that they own a big chunk of company networks, are you working closer with them; are your thoughts aligned in terms of business plan going forward?

Alexis Borisy

Obviously we can’t speak for other people, but we certainly do respect and value the input of our large shareholders, both as individuals as well as institutions, and as we plan for the future, we and our board of directors are seeking to create long-term value for all of our shareholders.

Operator

Our next question comes from the line of Matt Osborne - Lazard Capital Markets.

Matthew Osborne - Lazard Capital Markets

First, a few questions on the guidance, for the projections of cash carrying you through 2012, can you just remind us of the existing collaborations that likely generated around $14 million this year; I am assuming from Angiotech, Huntington’s Disease Foundation; should we assume that those partners are still funding the collaboration going forward and that’s also embedded in your guidance for cash that’s carrying you through 2012?

Alexis Borisy

I think I’ll break your question into two parts, which is to say some of those collaborations will be going forward, some will not just by the nature and the timing of what the agreements were, and obviously we do expect; there are no guarantees, but to sign new collaborations going forward here as well. However, in that guidance which is part of the reason for the broad range of $5 to $10 million, which we expect to be the run rate that will hit stride by the end of this year, and then going forward; we’ve tried to take a very conservative position in that in regards to collaborations. So, it’s not a view of the future through rose-colored glasses.

Matthew Osborne - Lazard Capital Markets

But it sounds like you’re assuming then with that cash projection that that assumes a new collaboration?

Alexis Borisy

It assumes that some of the existing collaborations end and it does assume one new one comes in. It doesn’t assume more than one new one coming in.

Matthew Osborne - Lazard Capital Markets

Just between the press release and I guess, Robert your comments, I just wanted to be clear on what the $5 million to $10 million burn represents; I believe in the press release it says, “…reducing its ongoing operating cash burn to between $5 million to $10 million annually,” but in your remarks Robert, you said beyond 2010 you’ll get to the $5 million to $10 million in cash burn. Are those two the same statements or am I reading this incorrectly?

Robert Forrester

What we’re saying is that we’re just coming off a much larger burn and it takes time to restructure obligations, etc., and so we’re targeting by the end of the year to be in the $5 million to $10 million range, i.e., this year will be slightly higher than this.

Matthew Osborne - Lazard Capital Markets

On the potentials for new chemical entities, Alexis, does that require a partnership before you would engage these new chemical entities, and should we expect some news in the first half of the year or second half of the year regarding these?

Alexis Borisy

The answer is no, it does not require that, although, yes, there might be such opportunities. If you recall the statement, NCEs should of course not be new. If we look back to our R&D data we held last summer, we started introducing the notion of that, and so you can imagine that we actually have a few of those things that already exist in our portfolio as it exists today, and I think there is a recognition of the type of additional value that you can get from the type of synergy and selectivity, the type of activity we have shown with our science, the type of selectivity of that activity, I think, is very compelling to people, and I think, with the additional proprietary advantages that one has from NCEs that that can provide a turbo-charged level of value.

Matthew Osborne - Lazard Capital Markets

Last question on Synavive, it sounded like coming out of COMET-1, that perhaps there were still interested parties, perhaps fewer, than going into the data; is there still interest there? Are you still funding this developing prospect for Synavive? Is there an opportunity in RA, and in particular if there is additional interest, what additional data would a potential partner like to see going forward?

Alexis Borisy

Yes, there still is interest in there. The question of our level of funding obviously to get down to the level that Robert was describing, we have to be very judicious and careful in our investments with that. The ongoing investment in that at the moment is the long-term safety because we think that’s an important piece of the puzzle overall as well. Exactly as you said, when you take a look at the clinical data, there are a lot of reasons to be optimistic about the clinical data from a clinical translation perspective, and I think if this was, as we were just talking about before, if this was a typical NCE with that data, we’d probably be sitting here with a partnership that we could announce today. I think with the questions that come with the data that fundamentally exactly as you said some further clinical evidence is ultimately required on that front from certain parties that are out there, and as we look at our portfolio and the places where we can place investments, as you can see clearly from the call here, there are multiple opportunities to have, but we need to be very judicious and careful in putting those investments in the most leveraged places.

Operator

Our next question comes from the line of David Miller - Biotech Stock Research.

David D. Miller - Biotech Stock Research

The first one I have is when is the convertible note that you have due?

Robert Forrester

You mean with the Singapore entity?

David D. Miller - Biotech Stock Research

That’s correct.

Robert Forrester

It’s due at the end of this year, but as we mentioned in the call, we’re in discussions with Bio*One, our Singapore partner, to basically get rid of that convertible note and to restructure it in the sense that we will not have any equity interest in CombinatoRx Singapore going forward.

David D. Miller - Biotech Stock Research

Are we likely to see any trials in 2009 absent a partner other than the safety work that you’re doing on Synavive?

Alexis Borisy

You’re saying any trials at all across the portfolio?

David D. Miller - Biotech Stock Research

Yes.

Alexis Borisy

The answer to that is yes, but you’d be looking at small-scale trials of very leveraged investments.

David D. Miller - Biotech Stock Research

Can you expand upon that a little bit more about what you mean about that; do you mean like one of your new chemical entities that you might be taking forward; phase I kind of trials or what?

Alexis Borisy

We’ve given the guidance that we’re comfortable with at the moment. The answer to your question is yes, and as you know there are multiple choices where one could place this very carefully, focused investments; I don’t think we’re prepared today to say exactly what those will be.

David D. Miller - Biotech Stock Research

We have been waiting for a number of months now on what the next steps for the company is in terms of product development, and in the PR and on the call we have lots of “we’re going to consider this” or “we’re going to consider that;” how long before we get some kind of a definitive statement as “okay, we’re going to do this with this product and we’re going to do this with this product” so that investors have some reason to think the stock price will be going up?

Alexis Borisy

David, that’s obviously a very fair question. I think let’s all recognize that the company has just gone through a very substantial restructuring, that we have multiple options that come in there, and that we have been gaining a lot of information on a series of our programs as such. I can’t give you the exact timing of when we can forward with that, but yes, that’s a reasonable expectation, and we’re not trying to provide any form of obfuscation to that, but simply we do not have the answers at this point today to give you that guidance except for to simply point out the types of programs that we have and the types of options that we have.

David D. Miller - Biotech Stock Research

Would we expect some movement on this in 2009 or is it longer out than that because of the restructuring around the NCE contract?

Alexis Borisy

I think having movement in 2009 and clarity to that is a reasonable expectation.

Gina Nugent

Operator, we have time for just one more call please.

Operator

Our last question comes from the line of Kenneth Hershberg - Hershberg Capital.

Kenneth Hershberg - Hershberg Capital

A few things; we were told that we should expect Fovea to be in the clinic last year. Is it in the clinic?

Alexis Borisy

Fovea is in the clinic, that is correct, with their product 1101 and what they’ve said is they expect results from that proof-of-concept clinical study this year, I think in the first half of this year, and we obviously have a substantial interest in seeing what those results look like, but probably when we have those results then it’ll be worthwhile spending some more time contemplating that.

Kenneth Hershberg - Hershberg Capital

I wish you would go into a little more detail about your discussions with BVF, one of your largest shareholders. They mentioned previously that they filed with the SEC that they would like to see you basically liquidated and considering their substantial holding; are you adverse to that? Are you considering it? What is your stance, what are your discussions with them about that?

Alexis Borisy

Obviously, what is of a public record from BVF, it’s a public record and I honestly cannot speak on behalf of BVF. I’d reiterate that we respect and value their input, both as individuals and as an institution, and as we plan for the future, we and our board of directors are seeking to create long-term value for all of our shareholders. I think as we described on the call, we do believe that there is value in CombinatoRx’s core strength and technology, on our platform, in our synergy and selectivity, and that we will continue with collaborations, sign new collaborations, and increase emphasis on using NCEs going forward and that we think with the restructuring that we put the company in a strong financial position going forward.

Kenneth Hershberg - Hershberg Capital

So, basically you are in disagreement with them then?

Alexis Borisy

It’s just not my place to comment about whether we are in agreement or disagreement about BVF. They can make whatever statements they feel are appropriate, and it’s just not appropriate for me to make comments to that regard.

Operator

This concludes the question-and-answer session for this call. I will now turn the call back over to Ms. Gina Nugent for closing remarks.

Gina Nugent

Thank you. This concludes the CombinatoRx fourth quarter and year end 2008 conference call. I’d like to thank you all for participating and hope you have a great day.

Operator

Thank you for your participation in today’s conference. This concludes the presentation.

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