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PharmAthene (NYSEMKT:PIP)

Q4 2012 Earnings Call

March 13, 2013 4:30 pm ET

Executives

Stacey Jurchison - Director of Corporate Communications

Eric I. Richman - Chief Executive Officer, President and Director

Arthur Y. Elliott - Acting Chief Scientific Officer

Linda L. Chang - Chief Financial Officer, Principal Accounting Officer and Senior Vice President

Jordan P. Karp - Senior Vice President, General Counsel and Secretary

Analysts

Nathan Cali - Noble Financial Group, Inc., Research Division

Raghuram Selvaraju - Aegis Capital Corporation, Research Division

David M. Nierengarten - Wedbush Securities Inc., Research Division

Operator

Good day, ladies and gentlemen, and welcome to the Q4 2012 PharmAthene, Inc. Earnings Conference Call. My name is Ben, and I will be your operator for today. [Operator Instructions] As a reminder, this call is being recorded for replay purposes. I would now like to turn the call over to Ms. Stacey Jurchison. Please proceed, ma'am.

Stacey Jurchison

Thank you, Ben, and good afternoon, everyone. Joining me on the call today are Eric Richman, President and Chief Executive Officer; Dr. Arthur Elliott, acting Chief Scientific Officer; and Linda Chang, Senior Vice President and Chief Financial Officer.

Before we begin, I'd like to point out that during today's call, we will be making projections and other forward-looking statements, which are based on our current beliefs and expectations. Please be aware that these statements are subject to certain risks and uncertainties. We advise you to consult PharmAthene's filings with the SEC for additional information.

I will now turn the call over to Eric to begin.

Eric I. Richman

Thank you, Stacey, and good afternoon, everyone. Thank you for joining us today for our year-end 2012 business review. Linda will take you through our financial results for 2012 in just a moment, but first I'd like to provide a brief recap of events during the past year and early 2013. We made important progress towards achieving our business and financial objectives. This included advancing our core biodefense programs, taking strength -- taking steps to strengthen our financial position and completing the appeals process in our litigation with SIGA Technologies.

We also made important progress addressing the clinical hold on our SparVax program. In August, we received notification from the FDA that was placing our proposed Phase II study of SparVax on clinical hold, pending the provision of additional data and information to the agency. As Dr. Elliott will report, we have worked diligently to assemble a comprehensive response that we believe will fully address the FDA's questions.

In 2012, the Delaware Court of Chancery issued its final order and judgment confirming PharmAthene's significant economic interest in Arestvyr, SIGA's smallpox antiviral therapeutic. We were awarded 50% of the net profits of a period of 10 years from worldwide net sales as defined in the Chancery Court's final judgment of Arestvyr and related products. This is after SIGA receives the first $40 million in net profits. Based on the trial court's decision, we believe the potential economic value of this award to PharmAthene over the 10-year period of enforcement is significant. Yesterday, SIGA announced that it had completed its first delivery of approximately 190,000 treatment courses to the Strategic National Stockpile and expects to complete full delivery under the contract within approximately 24 months.

SIGA has appealed aspects of the Chancery Court's decision to the Delaware Supreme Court, and we have cross-appealed certain aspects of the decision where we did not prevail. Oral arguments were presented by SIGA and PharmAthene in Delaware Supreme Court on January 10. We are pleased to be nearing the end of the appeals process. We remain confident in the merits of our case and confident of the decision of the Chancery Court and look forward to the final decision of the Delaware Supreme Court. Based on the timing of past Delaware Supreme Court decisions, we expect a ruling from the high court by the end of the second quarter, if not sooner.

Earlier this month, important biodefense legislation reauthorizing the Pandemic and All-Hazards Preparedness Act, or PAHPRA, was passed by unanimous vote in the Senate and, subsequently, by a significant majority in the House. It is anticipated that the legislation should be signed into law by the President this month. The PAHPRA legislation is the cornerstone of the government's long-term biodefense strategy, and its reauthorization signals strong, ongoing bipartisan support to the nation's medical countermeasure initiative. Passage of this legislation is important because it designates funding levels for the BioShield Special Reserve Fund and BARDA and includes provisions requiring more frequent and meaningful interactions between the FDA and medical countermeasure developers.

I would now like to turn the call over to Dr. Art Elliott, our acting Chief Scientific Officer, to review progress on our biodefense programs in 2012.

Arthur Y. Elliott

Thank you, Eric, and good afternoon. As Eric mentioned, our #1 priority over the past few months has been to address the FDA clinical hold on SparVax. In its notification to the company, the FDA requested that we provide additional stability time points for both the engineering and the GMP lots of U.S. manufactured final drug product, as well as additional information about our stability-indicating assays. As you may recall, in 2011, we completed the technology transfer of our manufacturing process from the U.K. to a U.S.-based contract manufacturing facility. At this point, we have obtained stability data of up to 12 months for the engineering lot of the final drug product and 9 months for the GMP lot of the final drug product. Based on the data we have generated, we believe that SparVax is both potent and stable.

We have made very good progress developing a complete response to the FDA. The process has been an iterated one, involving interaction and productive dialogue between PharmAthene and both the FDA and our customer, BARDA. I believe this has ultimately led to a better understanding of FDA's request for information. Consequently, we have now assembled what we believe to be all of the necessary information and requested data and plan to submit our complete response to the FDA within the next few weeks.

We have also been moving ahead with other efforts and milestone activities under our current SparVax contract, including both drug substance process characterization and the execution of nonclinical studies. We recently completed a nonclinical animal study of SparVax, which demonstrated potency and a dose-dependent immune response. As of December 31, 2012, there were approximately $28 million in available funding remaining under this contract, excluding potential options.

Moving on, progress in our recombinant bioscavenger program in 2012 was very encouraging. Late last year, in recognition of the technical program achievements, the Department of Defense exercised its option under our current contract to accelerate funding for this program. Based on preliminary data generated to date, we believe that our next-generation human cell culture approach should have significant advantages, including a more streamlined and cost-effective development and production process. We are continuing to work collaboratively with the DoD to execute on this contract and position the recombinant platform for future funding to initiate Phase I clinical development. Over the next several months, we expect to complete pharmacokinetics and animal efficacy testing that will inform future funding decisions by the DoD.

I will now turn it over to Linda to continue.

Linda L. Chang

Thank you, Art. Hopefully, by now, you have seen our 2012 year-end financial results press release, which we issued after market at 4 p.m. today. If you have not, you may access this information on our website.

In 2012, we set an aggressive goal of reducing our annual cash burn to $6 million or less to further optimize the capital efficient nature of our biodefense business model. Well, we're pleased to report that we have met and exceeded this target, and we executed a $7.5 million term loan and revolving line of credit with GE Capital to further strengthen our financial position.

We ended the year with $19.2 million in cash, including restricted cash, cash equivalents and U.S. government receivables compared to $18.8 million in 2007 (sic) . We substantially reduced cash used in operations in 2012, coming in at $2.3 million for the year compared to $7.8 million and $14.9 million net operating cash usage in 2011 and 2010 respectively.

Turning now to revenue. In 2012, we recognized $25.2 million in revenue compared to $24.3 million, which largely reflects activities under our SparVax and our bioscavenger programs.

Research and development expenses in 2012 were $19.5 million compared to $21.2 million for the same period in 2011. The $1.7 million decrease was largely due to a reduction in our internal research and development activities and decreased costs for our Valortim program. General and administrative expenses decreased approximately 19% to $11.6 million for the year compared to $14.3 million in 2011.

Finally, our net loss for the year was $4.9 million or $0.10 per share compared to a net loss of $3.8 million or $0.08 per share in 2011. The increase in our net loss in 2012 was primarily attributable to a reduction in other income of $6.4 million associated with the change in the fair value of our derivative instruments, offset by a $4.5 million decrease in our annual operating expenses.

Looking ahead, we have increased the operational efficiency of our organization to the point where we can expect to continue to operate close to 2012 levels in 2013 and beyond. Based on our cash and available funding under our current contracts, we remain solidly financed through, at least, early 2014.

With that, I will turn the call back over to Eric to wrap up.

Eric I. Richman

Thank you, Linda. As you have heard on this call, 2013 is going to be a very exciting and eventful year for the company. We look forward to submitting our complete response to the FDA, with data to support potency and stability in advancing the SparVax program. Next-generation rPA vaccines, such as SparVax, are an important element of defensive strategy, potentially providing cost-effective solutions to what is currently available.

We also anticipate a decision from the Delaware Supreme Court imminently and look forward to bringing closure to this litigation. As you've heard, SIGA has begun delivering Arestvyr to the government, which represents a significant milestone for the program and important development for PharmAthene, if the higher court upholds the current judgment. We look forward to updating you on our progress in 2013 and appreciate your continued interest and support of our company.

Operator, that concludes our prepared remarks for today. And if you would, could you please open the line for questions?

Question-and-Answer Session

Operator

[Operator Instructions] The first question comes from the line of Nathan Cali from Noble Financial.

Nathan Cali - Noble Financial Group, Inc., Research Division

The rBChE bioscavenger product with the PER.C6 technology, is that the Crucell, old Crucell technology that was acquired by Pfizer?

Eric I. Richman

Yes, that's exactly right.

Nathan Cali - Noble Financial Group, Inc., Research Division

Okay. Was it the FDA that asked you to -- and BARDA to move forward with that technology, or could you just give us a little bit of overview?

Eric I. Richman

Sure. Nathan, you may recall, our initial approach in that area was with a transgenic produced -- transgenically produced butyrylcholinesterase, and that was a program that was funded by the Department of Defense. And we had originally expected that we would deliver approximately 90,000 courses of therapy to the Department of Defense. After we completed a Phase I clinical study for that product and demonstrated that the BChE was effective in binding organophosphates, the DoD came back to us and asked us for a plan to produce a much larger amount of product that they would be interested in acquiring. The specific number was classified, and that number wasn't given to us, but it was far beyond the production capabilities of the transgenic system. So we looked for another expression system, one which was more familiar to the DoD and have produced proteins in large scale before. So we worked with Crucell at the time -- their spin out called PERCIVIA and developed that -- the technology to produce the BChE in the PER.C6 cell line. And to-date, we have been very successful in producing 2 forms of the butyrylcholinesterase under the DoD contract. And as you can imagine, this is an area of very high interest to the Department of Defense and other governments around the world.

Nathan Cali - Noble Financial Group, Inc., Research Division

Is it -- do you guys know what kind of price per dose you would be at for that?

Eric I. Richman

We have not -- we haven't disclosed even the range of where that would be. But I can tell you that it would be similar to pricing for other recombinant proteins that you would expect to see in the commercial markets.

Nathan Cali - Noble Financial Group, Inc., Research Division

Okay. And expectations on -- I know you're submitting to the clinical hold for SparVax. Any expectations when that may get lifted?

Eric I. Richman

Well, I can tell you what -- where we are in that process. As Dr. Elliott mentioned, it's been an iterate process with the FDA. We are much more comfortable with exactly what it is the FDA is looking for. Some of the data that they're looking for was actually time dependent. So it was stability time points, which we have generated. There is no additional data at this point to generate. We have generated all the data necessary. And we will be submitting that package, a very comprehensive package to the FDA, demonstrating potency and stability in the next couple of weeks. We're just in the -- at the point right now where we're basically QC-ing the documents, and that will be out the door in a matter of weeks. The -- once submitted and determined that it is a complete response -- and that's really what has driven the -- the delay in submitting that to the FDA is we want to ensure that we minimize the back and forth between PharmAthene and FDA. Once that is submitted, there's a 30-day time period that it triggers. So we would expect to hear back from the FDA within a 30-day period.

Nathan Cali - Noble Financial Group, Inc., Research Division

Okay. Will we know when you guys file that or just within the next couple of weeks?

Eric I. Richman

I don't expect that we'll make an announcement that it has been filed.

Nathan Cali - Noble Financial Group, Inc., Research Division

Okay. And then just one other question outside of that, for SIGA and the litigation there. They mentioned on their recent quarterly update that they were going to recognize revenue on a deferred basis. Now it was my understanding that 50% of the profits will go to you guys, if things stand the way they are, and that the judge would monitor the profit split if he needed to. So with consideration of them stockpiling the first 500,000 courses to get paid their first revenue stream, even though they're deferring the revenues, still, that profit is still available to PharmAthene accordingly. Is that your understanding, or is there any guidance on that?

Eric I. Richman

Well, our understanding at this point is, basically, what we have and what we know. And what we know at this point is that an initial 190,000 courses of therapy have been delivered to the Strategic National Stockpile. The trigger for invoicing BARDA is delivery of 500,000 courses of therapy. So our expectation, based on SIGA's guidance, is that will be achieved in the next couple of months. At that point, the way that the order -- judge's order from the Chancery Court reads is that there is a period of 60 days after the end of each calendar quarter, which details the amount of net sales, COGS, R&D, SG&A expenses and other information. So at this point, we don't have sufficient information to really adequately guide you on when the revenue -- when the profit split will be paid to PharmAthene. We have to make sure that the product is delivered, and that the lower court's ruling is upheld by the Supreme Court.

Operator

Your next question comes from the line of Ram Selvaraju from Aegis Capital.

Raghuram Selvaraju - Aegis Capital Corporation, Research Division

A couple of quick questions. First of all, with respect to the current litigation situation with SparVax -- sorry, with SIGA, can you refresh our memory as to what specific aspects of the original Delaware Chancery Court ruling PharmAthene appealed against?

Eric I. Richman

Yes. Jordan, are you able to address that? Jordan? Ram, I think it's more appropriate for Jordan to -- our General Counsel to address that question. He'll be joining us in just a moment. He is just, I think, trying to get off mute.

Jordan P. Karp

So what we -- I apologize for that. So what we appealed is the judge ruled that we had not shown that the terms of the term sheet in and of themselves were binding agreement and that they should be enforceable and were sufficient. And that's essentially the main focus in our appeal.

Raghuram Selvaraju - Aegis Capital Corporation, Research Division

Okay. Second question, which also pertains to the smallpox antiviral, is specifically with respect to price per course. Can you give us an idea of whether or not we should expect there to be any potential risk in the future of the government modifying the price per course under the existing stockpiling contract, or how set in stone that is?

Eric I. Richman

Well, I don't have all of the information related to the contract that was signed between BARDA and SIGA and much of it was redacted. What we do know is that there's a certain price per course of therapy for delivery pre-FDA licensure, and SIGA will receive that. And then there is a certain amount that is then paid to SIGA with FDA licensure, and there's a certain amount for extending the shelf life. Historically, what we have seen in the -- in other contracts with other products under this specific contract, once you enter into a price with the government, that price is the price, and there's no alteration. However, subsequent contracts, so future contracts for that same product, the price can vary, and that's typically based on volume, or perhaps it's a competitive process when there's another source of product.

Raghuram Selvaraju - Aegis Capital Corporation, Research Division

Okay. The last question I had was -- perhaps Dr. Elliott can answer this. I wanted to get an update from you regarding the next-generation anthrax vaccine after SparVax, where that stands currently and what we should expect as potential catalysts for that program and the timing of those catalysts that are likely to accrue over the course of the remainder of this year.

Arthur Y. Elliott

We have not disclosed any of that information, and we are working with several partners. So at this time, I would not feel comfortable with sharing any of that.

Operator

Your next question comes from the line of David Nierengarten from Wedbush.

David M. Nierengarten - Wedbush Securities Inc., Research Division

I guess I had another question on -- assuming your side -- if PharmAthene prevails in the appeal, what -- I guess sort of a little confused on what would happen or what remedies you have or how the stream of profits might begin to accrue to PharmAthene as in the -- according to the judgments, according to GAAP accounting. And it's our understanding I think, as alluded to earlier, that there'd likely be a significant receivables component on SIGA's balance sheet, et cetera. And I guess the question is what do you think the timing would be for your access or the beginning of that cash flow?

Eric I. Richman

Well, the -- first of all, David, thank you for joining us this afternoon. And I said previously, in response to a question, that, at this point, we don't have a lot of information about the timing of delivery and the invoicing to the government by SIGA. All we have is the judge's order, which says that on a quarterly basis, 60 days after the end of the quarter, we will receive information from SIGA and that will help us inform the timing of the revenue stream to PharmAthene. So, Linda, is there anything further that you'd like to add to that?

Linda L. Chang

No. But, David, as you know, it obviously will not be appropriate for us to comment on SIGA's accounting practice, et cetera, other than the fact that, as you know, they're a public company, so they have certain rules and standards that they have to abide by. And other than -- also, as you know, we're currently awaiting a decision on the appeal from the Delaware Supreme Court. So at this point, we do not have all the information. But rest assured, that we intend to be very diligent in protecting our interest once the final decision is known.

David M. Nierengarten - Wedbush Securities Inc., Research Division

And I guess just a quick follow-up. I guess the question goes back to -- and perhaps I missed something.

Operator

I'm sorry to interrupt you there, David. Unfortunately, that is all the time we have for questions. I would now like to turn back to the speakers for closing remarks.

Eric I. Richman

Well, thank you all for joining the call today. And as you've heard, 2013 is going to be a very exciting year. One of the big milestones we've been waiting for, for many years is delivery of Arestvyr to the Strategic National Stockpile. So we're very excited about that. And we're looking forward to the final resolution of the litigation from the Supreme Court. We're also looking forward to resuming the clinical program for SparVax next-generation anthrax vaccine.

I'd like to thank you all for your participation on the call today and look forward to keeping you updated on our progress. Thank you.

Operator

Thank you for joining today's conference, ladies and gentlemen. This concludes the presentation. You may now disconnect. Good day.

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