ZymoGenetics, Inc., Q1 2009 Earnings Call Transcript

ZymoGenetics, Inc., (ZGEN)

Q1 2009 Earnings Call

May 5, 2009 4:30 pm ET

Executives

Susan Specht - Director, Corporate Communications for ZymoGenetics

Douglas E. Williams, Ph.D., Chief Executive Officer

Stephen W. Zaruby - President

James A. Johnson - Chief Financial Officer, Executive Vice President, Treasurer

Nicole Onetto M.D. - Senior Vice President, Chief Medical Officer

Analysts

Edward Tenthoff - Piper Jaffray

Marshall Urist - Morgan Stanley

Jeff Elliott - UBS

Brian Abrahams -Oppenheimer

David Miller - Biotech Stock Research

Alex To - Cross Current Research

Presentation

Operator

Good afternoon. At this time I would like to welcome everyone to the ZymoGenetics First Quarter 2009 Financial Results Conference call. (Operator Instructions) As a reminder, this conference is being recorded. It is now my pleasure to introduce your host Miss Susan Specht Director of Corporate Communications for ZymoGenetics. Thank you. Miss Specht, you may begin.

Susan Specht

Good afternoon everyone and welcome to ZymoGenetics First Quarter 2009 Conference Call. Before we begin, I would like to remind you that we will be making forward-looking statements as part of our prepared remarks and in answering your questions. These statements are subject to many risks and uncertainties that could cause actual outcomes to be much different than we predict. Please look at our SEC filings, including the Form 10-K for more information.

Now I will turn the call over to our CEO Doug Williams.

Doug Williams

Thanks Susan, and thank you all for joining us on the call today. In addition to Susan I am joined by Stephen Zaruby, President, Jim Johnson, CFO and Nicole Onetto, our CMO. I would like to start today by giving you our perspectives regarding the restructuring that we announced last week and the context of our business priorities for the year. After that Stephen will provide an update on our RECOTHROM business activities. I will provide a status report on the Interferon lambda and IL-21 development programs and then Jim will wrap up with a review of our financial performance for the quarter. After that we will open it up for questions.

Since the beginning of the year we have been focused on achieving three important strategic aims for ZymoGenetics: First is continuing to build on the RECOTHROM momentum from fourth quarter 2008 and achieving our sales guidance of between $25 and $35 billion for the year; second, working with our partner Bristol-Myers Squibb to complete our Phase Ib Interferon lambda study in HCV and to initiate Phase II testing by year-end. Finally, to reduce our cash consumption through a combination of cost savings and licensing transactions. We are making progress on all of these strategic initiatives.

Last Wednesday we announced that we had implemented a corporate restucturing that included a reduction in our workforce by 161 employees or approximately 1/3 of our staff. It was a difficult decision, but one that we believe was necessary. With this restucturing we will be able to conserve the financial resources that we’ve built up over the past year and we believe avoid the need to raise additional capital to sustain our operations. We expect that our annual operating expenses will be reduced by approximately $30 million per year. Furthermore, with some of our pipeline decisions we expect that additional licensing transactions are possible in 2009 and 2010 which will generate additional value to ZymoGenetics.

The restucturing will not impact the level of effort or resources being devoted to RECOTHROM commercial activities nor to the Interferon lambda program with Bristol-Myers Squibb. What it will do is create greater focus in research and early development where we will discontinue our work on new oncology research programs. We will focus the remaining research efforts on selected immunology programs, which is the core strength of the Company. We have also reduced internal development and manufacturing infrastructure, allowing us substantially reduce our fixed costs.

These actions are consistent with our partnering strategy where our goal is to seek collaborations designed to access a partners late stage development and commercial expertise while maintaining rights for ZymoGenetics to participate in the commercialization upside in the U.S. when it makes sense to do so.

Consistent with our strategy to focus on immunology, we also announced yesterday a preclinical pipeline deal with Seattle Life Sciences. In exchange for licensing rights to eight preclinical stage assets we will be entitled to eventual milestones and royalties on product sales, as well as an equity interest in SLS in connection with venture funding. The assets included in this transaction were not being actively pursued, because they were outside of our area of focus.

Through transactions such as these we can unlock value from our extensive patent estate without committing our own capital to do so.

I will now ask Stephen to update you on RECOTHROM activities for the quarter and beyond. Stephen.

Stephen Zaruby

Thanks Doug. Good afternoon everyone. We have continued to make progress in the market with RECOTHROM and have recorded first quarter net sales of $4.5 million. In parallel, purchases by hospital accounts from wholesalers during the quarter were significantly greater than in the previous quarter and in line with our plan.

Net sales in the first quarter 2009 and fourth quarter 2008 were impacted by wholesalers stocking patterns. As we discussed in our fourth quarter call, we estimated that wholesaler inventories at year-end were approximately $800,000.00 higher than what would normally be expected. Wholesaler inventories came back in line during the first quarter and thus our first quarter reported net sales were negatively impacted. Effectively, $800,000.00 of our first quarter hospital demand was shifted into our fourth quarter reported sales. If one were to adjust for wholesaler stocking the fourth quarter then our reported net sales would have increased from $3.9 million in Q4 2008 to $5.3 million in Q1 2009. This reflects a healthy 36% increase from quarter-to-quarter.

More importantly, however, is an analysis of what is actually happening at the hospital level. We have a view of this activity using data provided to us by the major wholesalers about hospital purchases on a weekly basis. This information is not publicly available, but I can tell you that it shows that the volume of hospital purchases in the first quarter of 2009 increased by 45% over the volume purchased in the fourth quarter of 2008. This is a robust level of growth that was driven by increases in the number of hospitals ordering and increased size and frequency of orders placed by existing hospital accounts.

You will recall that on October 1 of last year we instituted the new discounting structure through group purchasing organizations. No significant changes have been made since then and we believe that the current pricing structure is competitive while reflecting the advantages of our product. Our net pricing has trended down in Q1 as additional accounts have taken advantage of the new discount schedule.

Based on what we are seeing in the market so far this year, we remain confident in the annual sales guidance we provided in February of $25 to $35 million net.

Since the beginning of January of this year we have revisited every strategic and tactical element of the RECOTHROM brand. It has been my position that no aspect of the brand, including, but not limited to, personnel, positioning, pricing or presentation is beyond scrutiny or challenge. As a result, we have instituted several strategic and tactical changes within the brand with more expected to follow over the remainder of the year. I believe that the result of these and many other initiatives will be an improved market presentation for human Recombinant Thrombin which has inherent advantages over competing products. I remain confident in the RECOTHROM brands potential and look forward to its continued growth in the marketplace.

Taking a longer-term view, we have been reexamining the potential of various line extension opportunities as a way of broadening the RECOTHROM franchise. From an investment perspective we have concluded that in certain cases the time and expense required to conduct clinical trials and to complete a full line extension development program is not justified by the potential revenue opportunity. In other cases, however, we are still evaluating options that show commercial promise. Beyond this, we also continue to identify and evaluate end licensing or acquisition candidates that could support our long-term strategy for the expansion of our surgical commercial franchise.

Doug Williams

Thanks, Stephen. Let me now turn your attention to activities in our development pipeline and specifically our progress during the last quarter with Interferon lambda and IL-21.

Early in Q1 we announced a very significant partnership with Bristol-Myers Squibb to develop and commercialize Interferon lambda. We have reviewed the structure and economics of the transaction in previous conference calls and I will not review all of those details again, except to point out that we received the initial $105 million under the agreement in Q1 and anticipate receivign another $95 million of license fees associated with Phase II study initiation before year end.

Interferon lambda is the most differentiated interferon under development. It is a unique protein distinct from Interferon alpha and all other interferon molecules in development. It is signaled through a unique receptor complex on a more restricted set of sales then the umbiquitously expressed receptor for Interferon alpha. That creates the real possibility of a better tolerated and safer interferon that retains the potent antiviral and immune mediated mechanisms important for eradication of HCV. This profile may also allow for easier use in combinations with the numerous direct antiviral drugs undergoing clinical testing.

We see Interferon lambda becoming the interferon of choice in combination regimens with these STAT-C and certainly the current the current front runners such as Telaprivir are achieving the higher SVR rates because they are combined with riboviran and a pegylated interferon. We are not competing with the STAT-C drugs, but plan to become an integral part of the emerging combination strategy of multiple drugs to combat HCV.

We recently presented an update to our ongoing Phase Ib dose-ranging study in relapsed HCV patients at the EASL meeting in Copenhagen. We have continued parallel enrollment of patients into both the single agent and riboviran containing combination cohorts and can conclude the following:

From an efficacy perspective we continue to see impressive antiviral activity at all doses tested with a mean of at least three logs of viral load reduction at all weekly doses tested, with our without riboviran. At four weeks with the three microgram single agent does of Interferon lambda half of the treated patients achieved undetectable levels of virus which corresponds to a rapid viral response or RVR, a significant predictor of achieving SVR status.

We are also exploring lower Interferon lambda doses due to the antiviral potency of this drug in order to define the entire dose range for Phase II dose selection and to maximize our therapeutic index.

In terms of safety we have seen minimal constitutional symptoms at all doses with no treatment related fevers. We have observed no decrease of neutrophil, platelet, or red cell levels with single agent Interferon lambda treatment and no apparent potentiation or riboviran-induced anemia has been observed at the doses tested.

Reversible, dose dependent elevations of AST, ALT and bilirubin were observed in some patients as reported for other pegylated interferons. The current protocol did not allow for dose modifications of Interferon lambda and like PEGASYS we anticipate that dose modifications will allow us to manage these patients through these transient and reversible changes in liver function tests. We are confident that the results from this stud will provide the necessary information on the dose range and therapeutic window through Interferon lambda and support moving this agent into Phase II testing. We currently expect Phase II dosing to be initiated later this year.

Shifting now to IL-21, we have two data presentations coming up in the next few months. You will recall that IL-21 is a cytokine discovered at ZymoGenetics that activates specific effector cells of the immune system and is being tested as a treatment for renal cell carcinoma and melanoma. We have presented data previously showing that IL-21 is tolerable for outpatient dosing and has antitumor activity in these two tumor types.

On May 13 we will be presenting our interim data on single agent IL-21 in metastic melanoma patients at the 7^th World Congress on Melanoma in Vienna. The recent disappointing news on Nexavar in melanoma highlights the ongoing need for effective treatments in this disease. We believe the interim data on IL-21 confirms the tolerability of this agent at appropriate doses and provides encouraging activity data which will need further confirmation in larger randomized studies. We expect to complete patient enrollment to the study by year end.

We will also be presenting our final data on our Phase II combination study of Nexavar + IL-21 in advance renal cell carcinoma at ASCO on May 31. This presentation will include final data on both response rate and progression free survival. We anticipate partnering this program late this year or early in 2010 and now have worldwide rights to this molecule after reacquiring X-North American rights from Novo Nordisk late last year. We believe that the data from these two studies are strong IP portfolio for IL-21 and the worldwide rights to this novel molecule will generate substantial interest.

With that, I will turn it over to Jim for a review of our Q1 financial performance.

Jim Johnson

Thank you Doug. Our net loss for the first quarter was in line with our expectations and substantiall lower than the first quarter of 2008. Improvement resulted from significantly higher revenues and reduced R&D expense.

Revenues for the quarter increased to $24.8 million, up from $13.5 million a year ago. There were two major items responsible for the increase, revenue recognized under our Interferon lambda collaboration with Bristol-Myers Squibb and higher RECOTHROM product sales.

As we discussed in last quarters call, revenue under the Bristol-Myers Squibb agreement is determined using the percentage of completion method. Revenue is recognized proportionately based on the costs we incur each period compared to our total expected costs. In the first quarter of 2009 our expenses under the agreement were $4.1 million and we recognized $8.9 million of related revenue.

We recorded net RECOTHROM product sales of $4.5 million for the quarter compared to $1 million in the first quarter of 2008. As Stephen indicated in his comments, this number was impacted significantly by the change in wholesaler inventories over the course of the quarter. By March 31, wholesaler inventories had declined to 3 to 4 weeks of trailing sales which is what we consider to be a normal level. Therefore, we don’t expect second quarter sales to be materially impacted by wholesaler inventory changes, and our reported net sales should generally reflect the underlying demand from hospital accounts.

R&D expense decreased by 37% in the first quarter of 2008 to $24.7 million: this is a reflection of our continued efforts to reduce the Company’s cost structure. The most significant factor driving this trend was the restructuring of our atacicept collaboration with Merck Serono which occurred in the third quarter of last year. Personnel costs also declined as a result of a reduction in headcount that took place in February of 2008.

Selling general and administrative expense for the quarter was maintained at roughly the same level as for Q1 2008 reflecting our continuing commitment to building RECOTHROM sales. We recorded $4 million of stock based compensation expense for the quarter, $2.4 million of that was reflected as R&D expense and $1.6 million was included in SG&A.

We ended the quarter with $152.6 million of cash and investments and we also have $75 million remaining under our Deerfield line of credit. It is available to us between now and January 2010 and is not repayable until June 2013. Considered together with the $95 million of milestone payments that we expect to receive from Bristol-Myers Squibb later this year we believe that our financial position is strong.

We have improved the outlook further as a result of the corporate restructuring announced last week. For the remainder of 2009 we expect expense savings of about $2.5 million per month or $20 million in total; however, this will be offset by severance costs currently estimated at $8.5 million, all of which will hit in the second quarter. Therefore, the net effect on a quarterly basis will be increased expense of approximately $4 million in Q2 followed by an expense reduction of approximately $7.5 million per quarter in quarters three and four. Approximately 80% to 85% of the reduction will be in research and development expense and 15% to 20% in SG&A expense. Over the longer term our annual expenses should be lower by at least $30 million per year which will have a major beneficial impact on our future cash flows and profit loss statements.

Since early 2008 we have taken several important steps to bring our costs down and improve our cash outlook. These include headcount reductions, restructuring our Atacicept collaboration with Merck Serono and entering into the Bristol Myers-Squibb transaction. Taken together with the expected increasing trend in RECOTHROM sales, we expect to see continued improvement in the Company’s bottom line.

With that we are now ready to take your questions.

Question-and-Answer Session

Operator

(Operator Instructions) Your first question comes from Edward Tenthoff from Piper Jaffray.

Edward Tenthoff - Piper Jaffray

First Doug, just back from [eosol], definitely pleased to see the great efficacy with Interferon lambda and that uniqe mechanism starting to bear out. I was intrigued by the liver abnormalities that we saw and I know that you said that they were reversible. Can you tell us was the bilibrubin direct or indirect increases and now as you go forward to reduced levels are you trying to find kind of that proper therapeutic window? Or, do you think you could actually go 4 out of the 3 microgram kg dose?

Doug Williams

That is an interesting question. I think with respect to the 3 microgram does obviously the efficacy was quite intriguing there with half of the patients essentially achieving an RVR, so I think that in the context of being able to look at that dose and potentially be able to come up with a dose reduction mechanism we’re still considering that. So we haven’t abandoned that dose.

I think that because of the study design we were unable to do what is sort of the traditional method of dealing with changes in liver enzymes which is to dose reduce the patients. If you look at the PEGASYS® package insert it is called out quite specifically in terms of how you would do that. That is obviously something that we will be exploring. I think that examining the lower doses provides us with a lot of insight in terms of what doses we could reduce to while still maintaining a robust antiviral response. So I think all that you are seeing transpire in the Phase Ib study is really setting us up to be able to choose the appropriate doses.

I won’t rule out 3 at this point, and certainly to define the lower end of that dose range where we begin to see the antiviral effects start to taper off. So, the goal here is really to provide information on the therapuetic index of this drug across as broad range as possible and to be able to use that in designing the Phase II study which ultimately will sort of define the final doses that we would go forward with into the registrational studies.

Edward Tenthoff - Piper Jaffray

Okay, perfect and a little bit more on the Interferon lambda from the PROVE data we’ve seen, even though we may not fully understand the mechanism of riboviran benefit in HCV patients we have seen that if you take [inaudible] to the riboviran you certainly take a hit on the potency of the interferon. What can you tell us about riboviran with Interferon lambda? Is it going to be necessary or do we have the potential maybe to spare riboviran with this immunomodulatory approach?

Doug Williams

That is an intersesting question. I think at this point I would agree with your characterization that at least in the PROVE study it seemed to suggest pretty clearly that pulling riboviran out had a definite negative impact on achieving SVR which obviously is something that you don’t want to do. I think at this point the best that we can say with lambda is that you can administer the two drugs safely. That there is no interaction from a PK perspective between the two drugs, which is a good thing, but I think it remains to be seen as to whether or not you can pull out riboviran from the regimen as you begin to add in maybe a second direct antiviral or a third direct antiviral.

Those types of questions will undoubtedly be addressed later on in the development process, but I think for now we are pursuing what I would characterize as a more traditional approach and that is to retain riboviran as part of the two drug combinations that we will move forward into Phase II. Since nobody quite knows how riboviran works, there is some speculation that there is an immune component to it. I think it is an interesting, but as yet open question that is going to require some time and some additional study to resolve.

Edward Tenthoff - Piper Jaffray

Right, thanks.

Operator

Your next question comes from Marshall Urist - Morgan Stanley

Marshall Urist - Morgan Stanley

Just to take these things in order, the first thing is just on the kind of plans going forward within the Interferon lambda agreement, could you take us just through say the next 12 months in terms of what data we’re going to see, the rest of the Phase Ib? Then also, potentially how you guys are thinking about what we might hear once the Phase IIb gets started?

Doug Williams

Yes we are trying to wrap up the Phase Ib study. Obviously we’re not going to be exploring doses forever here. I think we have a pretty good handle on the range of doses that we’re going to want to explore, so you can expect to see the sort of final data sets coming out of that including some data in naïve patients that we expect to gather here over the next few months. So, possibly at AASLB we will have to determine whether or not we have enough incremental data to warrant an abstract there, but likely there.

Then as far as the initiation of the Phase II study, I think we’ll be able to provide more information on the exact study design once we have passed through all of the regulatory discussions and finalized the study and begun dosing. We will have to coordinate those activities with our partner obviously. But, within the next 12 months you can expect sort of the wrap up beyond the Phase Ib and the initiation of the Phase II and at that point we’ll have a lot more information on the actual study design elements.

Marshall Urist - Morgan Stanley

Okay great and are you guys clear right now in terms of are you going to be able to talk about sort of RVR data, EVR data from that study, or is that we’re going to have to wait until the end of the study to get data on Phase IIb?

Doug Williams

Again, we will give you more clarity about those isues at the time we actually present the final study design and begin initiating patient dosing.

Marshall Urist - Morgan Stanley

Okay I understand and then switching over to RECOTHROM I just wanted to get a sense in terms of what drove the dynamics in the quarter? I know you guys aren’t giving sort of P&T updates anymore, which is understandable, but can we get a sense of share at accounts that you guys had heading into the quarter versus new account ads and how that played out over the first quarter?

Doug Williams

I think we have been trying to avoid, as you pointed out, getting down into the weeds with some of the metrics which admittedly may or may not be really relevant to translating into hospital demand. I think what we have continued to see is an increase in P&T committee meetings. We have seen an increase in letters of commitment which are a step in the process towards sales. I think where we’d begun to see more traction and that is really a function of I think Stephens efforts over the last few months with the sales team is in converting those letters of commitment into actual ongoing sales in those accounts and that has really been a major area of focus for us and is probably attributable in large part to that increase in actual hospital demand that Stephen alluded to.

I think all of that translates to essentially a continuing level of comfort on our part for the guidance we put out for the year. We are still guiding towards the $25 to $35 million number, but I think we’re seeing better execution, if you will, in the individual hospital accounts that is leading to that increase in demand

Marshall Urist - Morgan Stanley

Okay and then my last question would just be around your major competitor in this space and how have they reacted to your new pricing policy? Also, are you seeing another round of discounting after you guys initiated your new pricing policy, or have things been stable on that front?

Doug Williams

I think it has been fairly stable.

Marshall Urist - Morgan Stanley

Okay great. Thanks guys.

Operator

Your next question comes from Jeff Elliott with UBS.

Jeff Elliott - UBS

I have a strategic question for you. You are in the process of getting rid of the oncology asset and you are going to focus on immunology. You have got a lot of cash in the bank now and you’ve cut your burn. So, when I look at the Company now it is RECOTHROM and then theoretically an immunology company. There seems to be an obvious disconnect between those sort of aspects of the Company and then potentially a bit of a gap in the pipeline. So, would you consider in licensing or out licensing any of these assets to sort of create a cleaner story, not for the story’s sake but as a company?

Doug Williams

I think in the short run our goal is to continue to focus on building the RECOTHROM business to look for potentially additional products to get more efficiency out of that franchise. Over the long term I think that we’ve acknowledged that yes we do have essentially two businesses within this business. It probably used to be three if you include oncology and we’ve narrowed that focus down to two and our belief is, I think for the moment we plan to maintain that sort of two-pronged attack into the marketplace, and at this point we don’t have any intention of potentially splitting the Company in two.

Jeff Elliott - UBS

Maybe I am reading too much into it, but I got the tone that in terms of the line extension you were sort of deemphasizing that for RECOTRHROM. I know you talked in the past about bringing other products in. Is that something we should still look for?

Doug Williams

It is something you should still look for. I think we will be very smart about what, if anything, we bring in and I think don’t over interpret Stephen’s comments on the line extensions. I think all you should read into that is we have performed some additional commercial assessments on some of the presentations that we had considered. Some of those have fallen by the way side because the path to actually get them approved and the likely market that would be available to us at that point didn’t make sense for us to pursue that presentation.

But, there are other potential line extension ideas that are still viable and may move forward. So, I think all we’ve done is reassess at least the front runner which at the time was a flow able presentation. We have decided not to pursue that for commercial reasons. We may revisit that, however, if and when the FDA decides to revisit their classification of gelatins, there may be a very rapid path to approval without clinical trials at that point. We haven’t closed the door on it, but I think our current assessment, given the current regulatory environment is that that product didn’t make sense in its current iterations.

There are other ideas. Some of those may move forward, but they will all have to pass muster from a commercial assessment perspective.

Jeff Elliott - UBS

Okay and in terms of the preclinical assets that went to Seattle Life Sciences, is that a start up company? It looks like it was created to take advantage of those assets. Are there former Zymo employees there? Is that part of the restructuring that happened or?

Doug Williams

There is an individual that is a former Zymo employee who knows those compounds and had an interest in them. These are discussions that have been ongoing for awhile and these are assets that were essentially sitting on the shelf at ZymoGenetics. We had made the determination that we were not going to pursue then ourselves. We think this is a great way of potentially unlocking some value in our IP estate. We are going to get milestones and royalties and an equity stake in this company, so I think it is a great way for us to take what I would characterize as non-performing assets and potentially creating the opportunity to generate some value there.

Jeff Elliott - UBS

Great and I just have one financial question. Did you give any indication on the split between the accelerator revenue and the up-front amortization from Bristol?

Jim Johnson

I’m sorry I don’t understand your question. You mean the split in collaboration in license revenue?

Jeff Elliott - UBS

Yes.

Jim Johnson

We did say that $8.9 million is related to the Bristol collaboration.

Jeff Elliott - UBS

Okay, fair enough. I apologize.

Jim Johnson

Then the remainder is basically in Merck Serono and also the Bayer collaboration and there was also a milestone payment received this quarter from Novo Nordisk related to Interleukin-20.

Jeff Elliott - UBS

Okay great. Thanks.

Operator

Your next question comes from Brian Abrahams from Oppenheimer.

Brian Abrahams -Oppenheimer

I wanted to drill down a little bit more on something Stephen said earlier about pursuing strategic and tactical initiatives to try to improve RECOTHROM’s market competitiveness. I was wondering if you could maybe give us a few more details about where your efforts will be focused going forward.

Also, I know you have talked in the past about educating physicians about making a link between coagulopathies that develop and looking for antithrombin antibodies and I was just wondering what the receptivity among the physicians has been of to those efforts.

Doug Williams

We would prefer not to get into too much detail for obvious reasons about some of the tactical initiatives that Stephen currently has under way. I do think that one area that is imporant is, as you point out, this notion of helping to educate the marketplace to the ongoing nature of coagulopathies that develop and also how to be able to identify those. That is certainly one part of our strategy for really defining one of the major differentiating charactersistics of our drug versus thrombin JMI.

Those activities continue and there are a number of other initiatives that are underway that we would prefer not to talk about, but I think are all geared towards helping to generate additional traction in the marketplace for RECOTRHROM which we think is the best in class product and really deserves to be the product of choice in the hospitals today.

Brian Abrahams -Oppenheimer

Are you starting to see increased recognition of the differentiation, or do you think that that is something that you really are kind of in the process of laying the groundwork for and that will take more time?

Doug Williams

I think it is an ongoing effort. I think it is something that we initiated sort of shortly after the launch and we recognized right from the beginning that it was a process of education that was going to take some time. I think that we are beginning to make progress in that regard and that is going to require continuing efforts in order to really continue to bear fruit.

Brian Abrahams -Oppenheimer

Okay and then just a question on lambda. When you look at the dose ranging, I am wondering if you and Bristol have a particular goal I mind in terms of where you would like to be on an RVR basis or on a viral load reduction basis in order to potentially take a dose forward.

Doug Williams

I think we have a tremendous amount of flexibility given what we’re seeing. Obvoiusly to see half of the patients in the 3 microgram dose demonstrate an RVR was, I won’t say surprising, but I guess it was a little surprising given the definition of our patients and given that by definition those are patients who didn’t achieve an SVR. Since RVR correlates very closely with SVR, the fact that we’ve actually seen that is quite encouraging.

But, we also feel as though even at the lower doses that we are exploring now. To be seeing three logs at least of viral load reduction provides us with a lot of flexibility. If you look back at the little amount of data that is available in the form of publications in the public domain about Interferon alfa in a relapsed population of patients, it is more like a log of viral load reduction.

So, I think we are very encouraged by what we’re seeing. We have a lot of flexibility, we believe, in terms of picking doses that provide us with an acceptable therapeutic index. That is really the purpose behin the Phase Ib studies is really to sort of defin how high we can go and also to define sort of the break point where we begin to lose the antiviral effects at the lower doses and I think the study is achieving those aims.

Brian Abrahams -Oppenheimer

Great and I have just one final question on lambda. I am just wondering if you guys are planning to look at any more comprehensive tolerability scales to more clearly elicit some of the side effect advantages from a tolerability standpoint. Clearly you have some of the hematologic advantages that you have shown already.

Doug Williams

Yes, that will be part of our planning for future studies.

Brian Abrahams -Oppenheimer

Great, thank you very much for the added information.

Operator

Your next question comes from David Miller with Biotech Stock Research.

David Miller - Biotech Stock Research

In the financial moves and product line moves that you’re making, can you give us some sense of how you believe this will affect the productivity of your pipeline in terms of how many more new drugs we’re going to see into the clinic over the coming, say, 12 to 18 months?

Doug Williams

I don’t think it will have a major impact on the near-term flow of products into the clinic. I think what we are trying to do through these initiatives is really to reduce the overall level of cash consumption in the company to focus in on some of the key assets that are already in the clinic and obviously that process is going on. As I mentioned, we have not altered any of our staffing around RECOTHROM. We have not altered any of the staffing devoted to the lambda transaction. IL-21 is proceeding apace and we have a line up of preclinical candidates that would move into the clinic on schedule over the course of the next couple of years.

What we are really doing is trying to narrow our overall level of focus and really bring our overall level of spend down from where it has been in the past. So we made the strategic decision to move out of oncology research as one of our, what had been, three areas of focus and to be more limiting in the areas that we are pursuing.

We’ve really just reduced the overall scope of our activities. We still have pipeline candidates that could move into the clinic. We have assets that we have identified for future licensing activities which will generate additional capital for us, but also help us to move these forward into later stage clinical testing as well.

David Miller - Biotech Stock Research

All right and on RECOTHROM can you give us some idea either via projected date or kind of what your thinking is about when RECOTHROM is going to be at a net cash flow positive level that is going to be meaningful for the overall operations of the Company to help fund some of the other things that you have coming up that will hopefully be big sellers in the Company?

Doug Williams

I think if you look at the current run rate, we could anticipate some time in the later part of next year that we would begin to generate cash that could be applied for other aspects of the business.

David Miller - Biotech Stock Research

Okay, perfect. Thank you very much.

Operator

Your next question comes from Alex To with Cross Current Research.

Alex To - Cross Current Research

On IL-21 what additional work do you need to do that you think will get you to a licensing stage?

Doug Williams

The renal cell study is essentially complete and we will be presenting the final data at ASCO at the end of May. We think that that is an important piece of the puzzle. But, we also feel that completing the melanoma study, which we will have interim data on May 13 at the Melanoma meetings in Vienna, we should have all of the patients accrued to the study by the end of the year. Some time early next year we will have response rate and progression free survival data in that population.

Given that melanoma continues to be a very challenging area to have drugs that have demonstrable efficacy we think there is still a real opportunity there. We are going to begin dialoguing obviously with companies probably sometime during or after ASCO. We believe that the combination of both Phase II studies, melanoma and renal cell, will form the basis of an interesting package for those discussions to take place. That is why we’ve said the likely timing of a partnership would be the end of this year, or early next year.

Alex To - Cross Current Research

Okay and then I have an accounting question for Jim. Since your collaboration in the licensing revenue line is going to possibly fluctuate a little bit from quarter-to-quarter because of the timing of your recognition on the Bristol agreement, could you walk us through the next three quarters on a quarter to quarter basis what we should expect? Or is that too much detail?

Jim Johnson

I don’t think I can give you specific numerical guidance, but I can give you a sense of trend, I think. If you go back to the guidance we gave for the year, we said that that line item would end up being somewhere in the range of $95 to $105 million. At this point we have no definitive reason to change that. I think though that you are right. There will be some quarter-to-quarter fluctuation.

I think that first of all, as you know, the lambda program will be gearing up to move into Phase II in the second half of the year, so obviously as those costs increase in/out of revenue that we recognize related to that will increase as well. So, clearly that is back end loaded for the year.

I think generally speaking everything else is relatively constant. We will, I think, in October this year we will stop recognizing revenue under the Merck Serono agreement. So, there would be a bit of a fall off in the fourth quarter there, but probably offset, or at least largely offset by what’s happening with the lambda revenue.

There is one other aspect too, that of the timing of milestones payments that we received from Bristol related to lambda will also affect the quarter-to-quarter variation a bit and at this point we don’t have any reason to expect that to be the case, but it’s another factor out there that just makes predicting the quarterly revenue numbers very, very difficult, even for us.

Alex To - Cross Current Research

So you will have a milestone payment from Bristol on initiation of Phase II, am I correct?

Jim Johnson

There are actually two more milestone payments. We will receive both of them by the time Phase II starts.

Alex To - Cross Current Research

Okay so it is as you initiate your Phase II trial before the end of the year you will be able to make this $95 to $105 guidance?

Jim Johnson

Correct.

Alex To - Cross Current Research

Okay, thank you.

Operator

We have no further questions in the queue at this time. I would like to turn the call back over to management for any closing comments.

Doug Williams

I would just like to thank everyone for participating in today’s call and we will look forward to providing you with additional information at our next quarterly call.

Operator

Thank you. Ladies and gentlemen this concludes today’s teleconference. (Operator Instructions) thank you for your participation.

Copyright policy: All transcripts on this site are the copyright of Seeking Alpha. However, we view them as an important resource for bloggers and journalists, and are excited to contribute to the democratization of financial information on the Internet. (Until now investors have had to pay thousands of dollars in subscription fees for transcripts.) So our reproduction policy is as follows: You may quote up to 400 words of any transcript on the condition that you attribute the transcript to Seeking Alpha and either link to the original transcript or to www.SeekingAlpha.com. All other use is prohibited.

THE INFORMATION CONTAINED HERE IS A TEXTUAL REPRESENTATION OF THE APPLICABLE COMPANY'S CONFERENCE CALL, CONFERENCE PRESENTATION OR OTHER AUDIO PRESENTATION, AND WHILE EFFORTS ARE MADE TO PROVIDE AN ACCURATE TRANSCRIPTION, THERE MAY BE MATERIAL ERRORS, OMISSIONS, OR INACCURACIES IN THE REPORTING OF THE SUBSTANCE OF THE AUDIO PRESENTATIONS. IN NO WAY DOES SEEKING ALPHA ASSUME ANY RESPONSIBILITY FOR ANY INVESTMENT OR OTHER DECISIONS MADE BASED UPON THE INFORMATION PROVIDED ON THIS WEB SITE OR IN ANY TRANSCRIPT. USERS ARE ADVISED TO REVIEW THE APPLICABLE COMPANY'S AUDIO PRESENTATION ITSELF AND THE APPLICABLE COMPANY'S SEC FILINGS BEFORE MAKING ANY INVESTMENT OR OTHER DECISIONS.

If you have any additional questions about our online transcripts, please contact us at: [e-mail]. Thank you!