SuperGen, Inc. F1Q09 Earnings Call Transcript

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SuperGen, Inc. (SUPG) F1Q09 Earnings Call Transcript April 27, 2009 4:30 PM ET

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

Joe Pantginis - Merriman, Curhan Ford

Boris Peaker - Rodman & Renshaw

Operator

Good day ladies and gentlemen and welcome to the first quarter 2009 SuperGen earnings conference call. My name is Luisa 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 towards the end of this conference. (Operator Instructions)

I would now like to turn the call over to Mr. Timothy 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 2009 first quarter 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 Scientific Officer.

In a few moments, Jim Manuso and Michael Molkentin will deliver remarks on the 2009 first quarter financial results and provide a summary of our business outlook. After our prepared comments, we will open the line for questions.

Earlier today, we issued a press release of our financial results. A copy of the press release is available on the Investor Relations site 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 in clinical trials as we expect or that we 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 they will be 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.

We recently held our Fourth Annual Analyst Day in New York. For those unable to join us, the slides and webcast archived are posted in the Investor Relations section of our corporate website.

I will now turn the call over to Dr. James Manuso, who will provide highlights of our accomplishments during the 2009 first quarter.

James Manuso

Thank you very much Tim. Good afternoon, and thank you for joining us today for SuperGen's 2009 first quarter financial results conference call. SuperGen started 2009 on an upbeat, financially and with respect to our discovery and development programs.

Our 2009 first quarter financial and operational results were essentially as anticipated, including the first quarter profits and we are tracking with respect to our revised annual financial guidance for 2009. We recognized Dacogen royalty revenues of $12.9 million, representing a 59% increase over the same period last year. As a result, the Company maintained a strong unrestricted cash position of $91.8 million as of March 31st and we remained debt free.

We plan to keep total operating expenses in check to achieve a net cash burn for the year between $2 million and $3.5 million. During these challenging economic times, our goal is to maintain a reasonable balance between expenses and income, while at the same time advancing all of our discovery and development programs.

Our stable financial position serves us exceptionally well as we advance pipeline products toward proof-of-concept trials, pre-clinically and in the clinic. At the same time, we continued to pursue partnering discussions that will drive value. We seek only meaningful accretive strategic partnerships. This is possible because all our drug candidates are owned exclusively by SuperGen, and our pipeline is novel and diverse as evidenced by our first-in-class drugs.

On the clinical front, we dosed the first patient with SGI-1776, our first-in-class PIM kinase inhibitor. SGI-1776 is being tested in a Phase I clinical trial in patients with refractory prostate cancer and relapsed or refractory non-Hodgkin’s Lymphoma.

In addition, last week at the American Association for Cancer Research Meeting (AACR), we disclosed our novel first-in-class inhibitors of the kinase Etk, also known as Bmx, a unique target that is generating a great deal of interest.

At last week’s 100th Annual Meeting of the AACR, SuperGen scientists delivered an oral presentation on SGI-1776 and presented four other posters on our drugs. One poster featured the new class of Etk kinase inhibitors. Etk kinase is expressed in solid tumors including prostate and lung as well as in leukemia and lymphomas.

In preclinical studies, we observed that Etk inhibition blocks oncogenic signaling. We are currently completing the clinical candidate selection process to be followed by IND enabling studies. We expect to file an IND for what is expected to be the first-in-class Etk kinase inhibitor during 2010.

Success with the Etk program is an example of how our proprietary silico-based discovery process, CLIMB, is instrumental in the creation of novel and diverse product candidates. CLIMB’s modeling and drug ability screening processes enable us to pursue the inhibition of unique targets more rapidly and to determine the probable success or failure of drug candidates. We anticipate one additional first-in-class drug candidate to emerge from the CLIMB process during 2009.

With respect to our most advance drug candidate, MP-470, a DNA repair suppressor currently in a Phase Ib combination trial. Last week, at AACR, we presented two posters detailing further data on this promising drug that has been safely administered to more than 100 patients.

To summarize, SuperGen’s unique technology platform continues to generate first-in-class product candidates. Our growing revenue stream and strong balance sheet permit our Company to discover and advance select drugs through clinical proof-of-concept trial to maximize their value in partnerships.

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

Michael Molkentin

Thank you, Jim. Total revenues for the 2009 first quarter consisting entirely of royalty revenue was $12.9 million, an increase of over 59% compared with $8.1 million for the same prior year period. Royalty revenue is earned pursuant to a worldwide Dacogen license agreement and is generally recognized on a cash basis when received.

Excluding the gain on sale of products, total operating expenses for the 2009 first quarter were $9.6 million compared with $11 million for the same prior year period. The primary reasons for the decrease in operating expenses include lower research and development costs resulting from a shift and the timing of certain expenses incurred for product development activities relating primarily to our clinical trial programs, a reduction in general and administrative expenses resulting from overall lower corporate costs and the elimination of expenses in the current year due to the cessation of our European operations during 2008. Included in operating expenses are stock based compensation expenses of $600,000 for the 2009 first quarter compared with $747,000 for the same prior year period.

The gain on sale of products for the 2009 first quarter was $500,000 compared with $1 million for the same prior year period. The gain on sale of products from the 2009 first quarter includes receipt of an additional milestone payment resulting from the sale of our worldwide commercial franchise for Nipent in a prior year. The gain on sale of products for the prior year first quarter reflects receipt of an indemnification holdback relating to this transaction.

For the 2009 first quarter, the Company reported net income of $4 million or $0.07 per basic and diluted share compared with a net loss of $1.1 million or $0.02 per basic and diluted share for the same prior year period.

Regarding our financial position, the Company had unrestricted cash, cash equivalents and current and noncurrent marketable securities of $91.8 million at March 31, 2009 compared with $88.3 million at December 31st, 2008.

We have revised our financial guidance for 2009 as follows.

Royalty revenue is still expected to increase by up to 10% from the prior year to a range from $38 million to $42 million. As previously indicated, our royalty revenue is generally recognized on a cash basis when received. To be clear, our royalty revenue is typically paid one quarter in arrears. Therefore, our annual royalty revenue is generally derived from sales made by Eisai and J&J in the last quarter of our prior calendar year and the first three quarters of our current calendar year in question.

Though we expect research and development expenses to increase from the prior year overall, we have modified our initial 2009 guidance slightly downward to a range from $36 million to $38 million. The growth in R&D expenses continues to be influenced by increasing costs related to our clinical trial programs primarily for MP-470 and SGI-1776 and ongoing discovery and development efforts.

General and administrative expenses have also been reduced from our initial 2009 guidance and are now expected to be in a range from $9.75 million to $10.25 million. No additional gain on sale of products is expected during 2009 other than the $500,000 milestone payment already recognized during the 2009 first quarter. As previously indicated, the receipt of this residual milestone payment was related to the sale of our commercial franchise with Nipent in a previous year.

The annual net loss has been decreased from our initial guidance for 2009 and is now expected to be in a range from $5 million to $6.5 million. Included in total operating expenses our non-cash stock based compensation expenses estimated at $3 million. This non-cash charge remains unchanged from our initial guidance, excluding the non-cash charge from the 2009 revised financial guidance the net loss now projected results in a further reduction in the estimated basic non-GAAP annual cash burn to a range from $2 million to $3.5 million consistent with our goal of moving towards being cash flow neutral.

And lastly, our average annual shares outstanding are now expected to be approximately $59.2 million common shares.

This concludes a review of our financial results for the 2009 first quarter and comments on a revised annual financial guidance for 2009.

I will now turn the call back to Dr. Manuso for closing comments.

James Manuso

Thank you, Michael. As you have heard today and as I outlined at our Analyst Day two weeks ago, our financial position, scientific capabilities and productivity make SuperGen a premier oncology focused discovery and development Biotech Company.

The Dacogen franchise has provided us with a steady revenue stream. We are debt free and we are focused on managing, building, and growing the Company beyond the short term with an eye to the future. Spending conservatively, we continue to demonstrate that we can run the business sufficiently and we have a track record of consistently meeting financial guidance.

Our transition from a spec pharma or specialty pharma, “me-too”, kind of Company to a discovery and development enterprise has been completed. CLIMB, our proprietary discovery process and technology platform, has proven itself by generating first-in-class drug such as SGI-1776, our clinical stage PIM kinase inhibitor and the recently announced Etk inhibitors.

SuperGen has two fine partners, Eisai and Johnson & Johnson. Partnering is important to us. We look forward to monetizing further our discovery platform and select drugs in our existing portfolio.

As we have stated previously, we will not take any of our drugs that are not partnered into Phase III clinical trials. As we learn more about the complex biological processes and signaling mechanisms underlying cancer, our industry is moving away from the blockbuster model of drug development to a targeted therapeutic model. Larger companies are seeking novel targeted drugs from nimble discovery based companies.

SuperGen is particularly well positioned to benefit from these advents, since our strength resides in a capability of rapidly generating first-in-class drugs based on newly discovered biological mechanisms of disease.

Going forward, our milestones include the following.

In the third quarter of this year, we expect to have an Etk lead candidate. In the fourth quarter of this year, we will announce a lead candidate targeting yet another novel kinase. In the first quarter of 2010, we expect to initiate the AML Phase I trial of SGI-1776. In the first half of 2010, we expect to file an IND for SGI-110. In the second half of 2010, we expect to begin a Phase II clinical trial of MP-470, and during 2010, we plan to file an IND for a lead Etk kinase inhibitor.

I look forward to updating you on our progress in the lab, in the clinic and on the financial and business development fronts in the coming quarters. As always, we thank you for your interest in and support of SuperGen, and with that Dr. David Bearss and Greg Berk, Michael Molkentin, Timothy Enns and I are now ready to answer your 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 Joe Pantginis - Merriman, Curhan Ford.

Joe Pantginis - Merriman, Curhan Ford

Hi guys. Good afternoon and thanks for taking the question and congratulation on keeping a very strong cash balance.

Two quick questions if you do not mind. For the MP-470, if I recall correctly, we might be getting an update at ASCO on the study. I was just curious that the nature of the update we will be receiving and secondly, obviously, you have discussed your business strategy of not taking products through Phase II. So, I just want to get a sense of how advanced some of your partnering talks are for some of your pipeline candidates. Thanks a lot.

James Manuso

Okay. Greg, would you like to comment on 470 and ASCO?

Greg Berk

Yes. Joe, we are not going to have anything at ASCO and 470. We actually are presenting this coming weekend at the ESMO Lung Cancer Conference an update from the Phase Ib on just the lung cancer patients and the Ib, the non-small cell and small cell. That will be actually presented in a poster this weekend and ESMO’s Lung Conference and we will make that presentation available Monday morning on our website and we will surely send you that as well.

So, we will not have anything at ASCO but like I said this weekend at ESMO Lung. I think the second part of the question was directed towards you, Jim.

James Manuso

Thank you, Greg. Yes, with respect to our partnering discussions, well, we do not give specific color or details in that regard. What I can represent is that we are very actively in discussions and we would never do anything that is not going to be perceived by us, let alone by our shareholders as non-accretive. Anything we do has to, in effect, be profitable based on the DCF and related financial modeling that we undertake in assessing these things, and as I have said before and as you know, we are not afraid to walk away from something that simply does not make sense especially in a buyer’s market because this continues in our view to be pretty substantial buyer’s market. But we are moving on that and we are pleased with our progress.

Joe Pantginis - Merriman, Curhan Ford

Okay. Thanks for the update Jim.

James Manuso

Thank you, Joe. Next question, please.

Operator

(Operator Instructions) Your next question comes from the line of Boris Peaker - Rodman & Renshaw.

Boris Peaker - Rodman & Renshaw

Could you comment a little more about the royalty on Dacogen this quarter? I mean it is quite a big jump over the prior run rate. So, if you could maybe…

James Manuso

Just in general, one comment here, we have said for sometime that the two important observations. When you look at the IMS data, recognize that that is for North America only. That does not include anything that J&J is doing, and recognize further that J&J has, to date, registered the drug in more than 30 countries outside of North America and is actively selling and marketing the drug in more than 15 countries outside of North America.

So, that is an important variable here, and the other important variable is that the North American hypomethylator market is, as we projected, expanding. To give an example, in February of 2008, the IMS figures were $24.5 million for both Dacogen and Vidaza sales. February 2009 sales were $29.6 million.

So, you are seeing two impacts here. But now, I will hand it over to Michael Molkentin for any additional detail on that.

Michael Molkentin

Yes. The thing you need to keep in mind when you look at SuperGen’s guidance and quarterly reporting of royalty revenue is that we record our royalty revenue on a cash basis and it is typically a quarter in arrears as I indicated in the initial comments earlier in this call.

So, what you will see when you go from quarter-to-quarter during a year, you will see that our first quarter royalty revenue is actually the fourth quarter revenue as reported by Eisai and J&J from 2008.

When they do the computation to us, if you recall, we have an escalating royalty stream that starts at 20%, increases at 2.5% for each additional $50 million in sales to 30% annual sales of $200 million.

So, what happened is when you take a look at the four quarters during the course of the year, if there is no change in sales, I am just going to use an example, let us say our sales are $50 million a quarter and during the course of the year when you do the royalty computation, the fourth quarter will result in the highest royalty revenue being earned. We recognized that in the first quarter.

So, what will happen now in the second quarter is all that gets reset because we will not recognize royalty revenue on Q1 sales from Eisai and J&J. We will recognize that in the second quarter which will be based on their first quarter sales.

So, we will always have that lag. So, the robustness of the first quarter royalty revenue is based on royalty revenue at a near or close to 27.5% based on 2008 product sales. Does that help to explain that?

Boris Peaker - Rodman & Renshaw

Yes, absolutely. But looking back in 2008, the reason it was going to flat in the Q1 versus Q2 is because the growth rate outpaces this drop in royalty rate? And we are assuming that that is not certainly going to happen in 2009? Am I right in that assumption?

Michael Molkentin

It will not be flat, if that is what you are assuming. Assuming that the product sales were the same in Q1 of this year versus Q4 of last year, the royalty will be based on 20% versus the higher affected royalty rate.

Boris Peaker - Rodman & Renshaw

Okay. I got it.

Michael Molkentin

And also, to take a quick look at IMS sales from December ’08 through February ’09, oftentimes at the end of the year, you will have some stocking up and indeed, in December of ’08 combined Dacogen and Vidaza sales were $33.6 million. This went down to $30.5 million in January and then it tipped off a little bit further to $29.6 million in February of ’09, but again, appreciate that in February of ’08 those combined sales were only $24.5 million.

So, like again, it gets back to my earlier point about North American hypomethylator sales are expanding.

James Manuso

Any other questions, please.

Operator

At this time, we have no more questions and I would like to turn the call back over to Dr. Manuso for any closing remarks. Sir?

James Manuso

Well, thank you very much. Given that there are no further questions, we invite you to view our website or to contact us in the event that you have any questions that need to be answered and thank you very much for your time and consideration. Have a good afternoon. Good-bye.

Operator

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

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