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Flamel Technologies SA (NASDAQ:FLML)

Q1 2009 Earnings Call Transcript

May 11, 2009 8:30 am ET

Executives

Stephen Willard - CEO

Siân Crouzet - PFO

Analysts

Matt Kaplan - Ladenburg

Peter Butler - Glenhill Investments

Tom Weissenborn - Credit Suisse

Operator

Hello, and welcome to Flamel Technologies' first quarter 2009 earnings conference call. All participants will be in a listen-only mode. (Operator Instructions). Please note, this conference is being recorded.

Your host for today's call is Stephen H. Willard, Chief Executive Officer of Flamel Technologies. Mr. Willard, please begin your call.

Stephen Willard

Thank you very much and good morning, ladies and gentlemen. We open as always with the forward-looking statement language, which is set out at the conclusion in today's press release. All statements made on this call are subject to a variety of future events and risk factors, including those set forth in our filings with the SEC, particularly our Form 20-F, which are all publicly available. Please review them and they are directly applicable to every element of this call.

Our first quarter result highlighted the success the company has achieved in leveraging its strengths to build a solid foundation for growth based on innovative technology, a prudent partnership approach that recognizes the advantages that working with leading companies confers on Flamel, the ability of our scientists' to create valuable working relationships with their colleagues in these partner companies and force the stability that Flamel enjoys in terms of financial resources at a time of relative difficulty in the industry.

I would like to briefly review the first quarter highlights and then I will ask Siân to review our financial result. We were, of course, very pleased that Merck Serono exercised its option to license to Medusa technology for one of their already marketed therapeutic protein this past February. We received a EUR5 million upfront payment, that's about $6.5 million, during the quarter [personal] to the contract that we signed at the beginning of the project. As many of you will remember, this program was initiated in December of 2007.

During the time that we have been engaged on this project with Merck Serono, our scientists have forged a strong working relationship with their scientific counterparts. We are very pleased with the results that we have generated on the project, both with respect to the product itself, but also with respect to have it relates to the Medusa platform as a whole. Our expectation is that this program will serve as a strong showcase for the strength of the Medusa platform as it advances and data become public.

During the fourth quarter, we also achieved a milestone with GSK regarding COREG CR, triggering a $4 million payment. This payment was based on the second anniversary of the launch of the product and is not included in our published cash and marketable securities as of the end of Q1.

Our relationship with GSK remains strong and we believe that they have a good understanding of the strengths that Micropump can offer for the delivery of controlled release small molecule drugs. The quality of the work that we have achieved for GSK has benefited us in many ways, not least by increasing our visibility and reputation with other large players in the industry and small players as well for that matter.

I hope that you have all had a chance to read the press release detailing our financial results for the first quarter as went out this morning. Obviously, we are pleased to have increased our revenues, strengthened our cash during the quarter and achieved profitability.

Siân, would you please review the first quarter results.

Siân Crouzet

Thank you, Steve, and good morning, everyone. I'm pleased to discuss quarter one results, which were highlighted as Steve pointed out by growth in revenues and increase in the company's cash reserves, and the profit of $1.2 million during the quarter.

The results continued and, in fact, accelerated certain trends that we have discussed in previous quarters. These trends are increased R&D revenues, cost prioritization, and improved earnings quality.

When we look at our revenues during the quarter, these were affected by the $4 million milestone, which we invoiced to GSK in March. In the year ago period, we had received a EUR0.5 milestone from Merck Serono, which was approximately $750,000 at that time.

Leaving aside these items, what shown important contribution to our financial results, but which can make analysis more difficult with regard to underlying trends, we enjoyed a 53% increase in R&D research revenues year-on-year and in constant currency terms.

We highlight these revenues that they are an important leading indicator to the extent that they reflect the increased interest in our technology platforms. In effect, the price in this line item is one of the things we look at to gauge eventual license fees, milestones, and clinical R&D revenues which we could receive if and when projects progressed further into the clinic.

Our operating cost during the quarter declined somewhat in constant currency terms. A decline that was magnified in dollar terms by the weakness of the dollar versus the euro year-on-year. With respect to the research and development cost, much of it declined due to timing and commitment of certain expenses, which we expect to reverse in future quarters. Our effort to contain non-critical expenditure has led to a decline in SG&A cost year-on-year.

The FAS 123R non-cash charge for the quarter amounted to $1.4 million. Our cash and marketable securities at the end of the quarter was $39.1 million versus $37.1 million at the end of the last quarter of 2008. This increase in cash did not include the $4 million we have invoiced to GSK, but it does includes the payment from Merck Serono for the EUR5 million as an upfront fee following the exercise of that option to the Medusa technology.

The cash and marketable securities position is better effected by negative exchange rate variance during the quarter. As per the exchange rate effect, cash and marketable securities would have increased by $3.6 million in the quarter.

We are pleased with the success of our efforts to build the company with a diversified foundation of multiple projects with multiple partners across different platforms and in different indications. It is for this reason that we are positioned to benefit from milestones, such as the one from GSK and to report a profitable quarter.

As I began by pointing out, these results represent the continuation of several trends that we have pursued over the past two years. We are pleased with the progress we have made thus far, and look forward to further continuation of these trends as events unfold over the coming years.

With that, I would turn it back to Steve.

Stephen Willard

Thank you very much, Siân. It has been a little over two months since we last hosted a conference call, so I will try to be brief in my remarks hoping to leave more time for questions.

As we mentioned, our Q1 cash and marketable securities number did not include the $4 million milestone that we invoiced GSK in March. That will be included in our Q2 balance sheet.

We are very pleased to have achieved profitability in the first quarter of this year, because it speaks to the strength of the work that we have done and continue to do with our partners, the commercial success of our platforms and the strong work that our scientists have achieved working together with the partners we have attracted. We are in a strong position where as things stand now events can push us into profitability very easily.

I would also like to point out that our fiscal responsibility has extended for a significant period of time now. In the third quarter of 2007, when we cut back on expenses in response to COREG CR sales, which were far less than projected, we had $40.8 million in cash and marketable securities. Today, six quarters later, our cash is $39.1 million, a decline of only $1.7 million over the six-quarter period. More importantly, during this period, we have made tremendous strides both with our technology and our relationships with new partners.

We have every reason to be confident in this regard. Recently, we have taken steps to streamline our feasibility projects, so as to prioritize our work. This was necessary in order to favor those projects, which we believe have the greatest commercial appeal for potential license agreements and also to open capacity for the agreements that we are currently negotiating.

We have updated our presentation accordingly to reflect that we have one fever vaccine project and one fever therapeutic protein project. Both projects were being conducted with smaller companies that faced funding constraints that were of concern to us.

With respect to vaccines, we still have one active partnership with the Top 20 company and we are currently in discussions with two Top 10 companies for new vaccine programs. These companies have far greater resources to apply to vaccine development. We now know a lot more about the applicability of Medusa with respect to vaccines as a result of the work that we have completed over the past two years.

We are also negotiating a number of feasibility programs both for Medusa as well as Micropump. The negotiations are for the most part well advanced. We expect that there should be a number of updates in this regard over the coming months. With respect to our remaining ongoing studies, we are pleased with the data that our scientists are generation and expect that a number of these studies could lead to license agreements this year.

With respect to many of our feasibility programs, the point at which a company chooses to exercise a license, is entirely at their discretion. As a general matter, we prefer that a company develop more data using our platforms rather than less, as this favors our negotiating position. Fundamentally, the greater the value we are able to create for our partners, the better our position in these negotiations.

Sometimes this is a function of the molecules that we are working on as much as the strength of the platforms themselves. Some molecules required greater functionality that others either because of the nature of the indication, the nature of the molecule itself or some combination of the two. A corollary to my earlier comment is, the greater the problem, the better our position.

This is one reason that we continue to invest in creating greater comparative advantage for both Medusa and Micropump. Some of this investment is being done on the standalone basis and other efforts are being conducted using our partner's funds. As an example of the first approach, we have worked over the past year-and-half on our own to extend the duration of release for the Micropump platform.

Currently, Micropump has many strengths that make it, in my opinion, a best-in-class technology. Its principal strengths are the ability to affect the controlled release with precise pharmacokinetics consistently for all patients using a variety of dosage formulations.

If we succeed in extending the duration of actions significantly beyond the competition, we will create new markets for the platform. Large pharmaceutical companies are always interested in product life extension strategies, particularly if there is a compelling therapeutic rationale. Many molecules are not commercially developed because the molecules have very short half-life.

As an example of the second approach, the one using partner funds, we are working with the Top 10 pharma company to demonstrate the ability of Micropump to be used in over-the-counter liquid formulations, which could be administered to children. This should give us further opportunities to access pediatric and geriatric markets for which we have long believed Micropump was ideally suited. The over-the-counter market is also very attractive to us. In this the time-to-market is reduced compared with prescription drugs.

We are using the same two-pronged approach with respect to Medusa. Several of our ongoing feasibility programs are for new applications of the Medusa platform, by which I mean different modes of application amongst others. We are pleased to be able to leverage the scientific and economic resources of our partners to further develop the Medusa platform.

Our partners gain potentially beneficial terms with respect to the molecules we are working on and we are able to further develop the platform so as to extend our comparative advantage and create more value-added solutions in different therapeutic settings.

We are currently negotiating with two large pharma companies to sign projects that will be based on specific knowledge we built using this approach. We are very pleased with the traction we have achieved using this approach, and that we have been able to accrue this intellectual property with minimal expense. It is a very efficient model.

As we look to the remainder of the year, we are encouraged with the progress we have made with the programs we have in development, with our backlog of projects in discussion and negotiation, as well as of the interest that we have for our internal programs. The potential for all three of these sources of growth to contribute to the strength of the company over the coming year has never been greater.

With that, I would now be pleased to take your questions.

Question-and-Answer Session

Operator

(Operator Instructions). Our first question comes from Matt Kaplan from Ladenburg. Please go ahead.

Matt Kaplan - Ladenburg

Just following up on some of your prepared remarks, can you talk a little bit about the visibility you have in terms of the transitioning of some of your feasibility studies to commercial agreements, meaning, I guess, you look at the stage of developments and maturation of those feasibility studies, what do you see, I guess, going out in the next six to 12 months in terms of some of those transitioning or, I guess, either transitioning to commercial agreements are falling off and no longer being there?

Stephen Willard

Sure. We wanted by creating the metric system, the metrics that we have in our slides, which are in our corporate presentation, we made a commitment to you, our investors, to give you as much information as we can about as many of the projects as possible. I did mentioned earlier that with two projects we are letting go because we have concerns about the financial viability and we have other things that we expect to be signing fairly shortly that can better utilize the scientists who have been working on those projects.

With regard to how the projects are progressing, there is a metric on page 29 of the slide that shows that we've gone from two projects a year ago in preclinical or beyond to 13. Because we have so many different projects now into preclinical and clinical work, I think I am very optimistic that we have a lot of opportunities for things to convert into the license agreements that we discussed. Although it's hard to have particular certainty with regard to any particular project, but with 13 projects there and with some other projects where we are negotiating, hopefully, directly to go into license agreement, I think there will be a good bit of information coming from Flamel over the next six to nine months.

Matt Kaplan - Ladenburg

Just a quick follow-up on that. In terms of the two projects that you have [to offer] I guess, new projects that you expect to have online shortly, how should we think about those impacting your R&D revenues?

Stephen Willard

They will have no impact at all.

Matt Kaplan - Ladenburg

Great.

Stephen Willard

Go ahead.

Matt Kaplan - Ladenburg

No, go ahead. Sorry.

Stephen Willard

No. The answer is we've got other things that will immediately take up the scientists. So they will have no impact at all financially.

Matt Kaplan - Ladenburg

Right. Just to be clear in terms of during the quarter, what were your non-cash compensation charges for the quarter?

Siân Crouzet

The first one, two, three are non-cash charge with $1.4 million.

Operator

(Operator instructions). Our next question comes from Peter Butler from Glenhill Investments.

Peter Butler - Glenhill Investments

During the quarter there was, I think, some controversy. I don't know what the source of it was, but in fact this Glaxo payment was not a previously contracted for a milestone, but in fact it was sort of a goodbye kiss to Flamel. Could you clarify what exactly this rumor was or source?

Stephen Willard

I had heard that rumor. We don't respond to rumors no matter how silly, but except in conference calls, and I'm glad to address it on this conference call. As I said very clearly in two or three conference calls prior to this, the remaining milestones from GSK were time-based and not in any way based on a result. This particular milestone was based on a payment, which would be made on the second anniversary of the first sale of COREG, which occurred late in 2007.

That was exactly what the $4 million payment was made for. It has absolutely nothing to do with our relationship with GSK. Our relationship with GSK is excellent. We wish they would sell more COREG CR. Our relationship is excellent, and in no way is it a suggestion of anything other than the fact that two years have expired since the first dose of COREG CR was sold.

Peter Butler - Glenhill Investments

Okay. Okay, glad that's cleared up. Okay, you spoke of the possibility, it sounds like the probability of upgrading some of the feasibility studies. I think previously you had worried that you were getting at capacity with your scientists. I guess this is part of a deliberate culling out of the best potential projects and bringing some new guys in with some bigger bucks. Is that the right concept here?

Stephen Willard

That's exactly it. I mean the reality is we are living in a difficult financial time for some of the companies, particularly the smaller ones. Sometimes there are questions about whether they are going to be able to take the projects forward as we wish. I mean, with each of our partners, we are delighted to work with them because we continue to develop our technology. When we do have choices between projects, we will obviously go for the ones that will deliver the greatest revenue to Flamel not only in the short-term, but we hope and expect in the long-term.

So, we are doing a process of not only looking at projects that may not get to market because of issues with our partners, we are also able to take on additional feasibility projects because many of our projects have moved into pre-clinical and clinical stages. Also, we would expect to hire very carefully a few more scientists, but the expenses will be more than covered by revenues that we have signed up or in the process of signing up. So, I would expect us not only to organize our projects better with regards to our partners but perhaps hire five or six more scientists.

Peter Butler - Glenhill Investments

Okay. In addition to, I guess, on one side of the coin, you are looking like you're going to upgrade a couple of the low-end projects. On the others, were there any notable successes? Did you push the ball towards the goal line any on signing some commercial agreements? Is this part of the news that you expect to have forth coming from Flamel in the next six to nine months?

Stephen Willard

Yes. We have some really significant stride scientifically in the ability to deliver a variety of formulations which we didn't have the ability to do previously. We are now doing interesting work with intravenous applications, with a variety of things that previously we didn't have the answers to. We've had some very significant scientific successes across the board, which make it far more likely in my view that we will be moving more projects to the licensing and greater financial benefits for Flamel.

Operator

(Operator Instructions) Our next question comes from Tom Weissenborn from Credit Suisse. Please go ahead. Mr. Weissenborn, you have the next question.

Tom Weissenborn - Credit Suisse

Steve, at your last conference you participated in Boston. I think it was in Cowen. You spent there a good deal of time talking about, what I guess I would refer to, is some of your legacy programs. Then you've talked about new scientific formulation improvements in this call. Can you address a little bit more in detail, where you are with those programs moving them forward? If any of, there are any advances in science that could help move those programs that are at a more accelerated rate?

Stephen Willard

That is a great question. The answer is yes. Some of our new scientific developments could be used to brief new license of some of our legacy products. We could do that at relatively little expense, one of the issues we face is that it will take more time before we are able to license those projects.

So as is typical with Flamel, we are moving forward on both fronts. We are continuing discussions with partners with regard to the legacy, but also some of our new scientific developments. We are beginning to apply those to some of the older products, because we think they can make them significantly more interesting to our partners.

Tom Weissenborn - Credit Suisse

I guess Steve, do you think that those products have been slowed because people are waiting for these scientific improvements? Or do you think there is a chance that some of those programs could be moved forward in the next six or nine months also?

Stephen Willard

Yeah, I don't think they have been slowed because we haven't been talking that we have been trying to sell the product as it is rather than talking about the additional changes that we can make for them. I think it's a question particularly with the largest ones of the Alpha Interferon and the insulin. It's just the question of people paying $300 million that it will take to get these products to market. It is not an issue with regard to Flamel's cost or with the product. It's just the strategic decisions finding the right people who are willing to make $300 million investment to get these products to market.

Operator

Our next question is a follow up from Peter Butler of Glenhill Investments. Please go ahead.

Peter Butler - Glenhill Investments

Yes. Please. You didn't mention what the total number feasibility studies you have now. Is it 13? Was that the number I should be using? With all these 13 plus projects, would any of them be labeled as an application of a third leg of Flamel's technology in addition to Micropump and Medusa? Have you developed the third leg? Is this third leg being used in any of these feasibility studies?

Stephen Willard

Sure. First of all, like, the correct number is 16. We had 18. We've made the decision to reduce that to 16. I expect by the next conference call that number will go up again as we are in fairly late stage negotiations on a number of things. The correct number as of today would be 16.

With regard to the technologies, Micropump and Medusa will continue to remain our core technologies. One of the scientifically extraordinary things that we've been doing lately is that we've been working on combining the two and that has led to some really interesting results. In terms of anything other than those two technology platforms, no, those are going to be the horses that we continue to move forward with.

That also goes for the question of in a world such as today we are bombarded with people who are trying to sell us new technologies, because they are running out of money and that sort of thing. I would like to reiterate what I said for a couple of years now; we do not see ourselves having any need to acquire technologies from anyone else. Our technology continues to amaze us with what it is capable of and we will continue to focus on our two technologies as we go forward.

Operator

Our final question for today comes from Tom Weissenborn as a follow-up from Credit Suisse. Please go ahead.

Tom Weissenborn - Credit Suisse

Steve, could you talk a little bit more about the two projects that you dropped? I mean, what platforms, was it Medusa or Micropump, what type of indication they were, for how long they'd been in the pipeline, were they sort of first-in, first-out or when did they come on board?

Stephen Willard

Sure. Both were Medusa. One was a vaccine program and the other was for a therapeutic protein. I don't remember off the top of my head, how long they'd been in the pipeline. I think it's been over a year, maybe 2007 for both of them. Again, I think it's a wise decision on our part because, as I said in response to a question from Matt Kaplan, ceasing work on those two projects will have absolutely no economic impact on Flamel of any kind, and in fact is likely to be a positive because I can move those scientists to some of the new stuff that we expect to be coming in very shortly.

Tom Weissenborn - Credit Suisse

Steve, just one other follow-up. I mean you got the $4 million milestone payment from GSK during the quarter. Are there any other time-based milestones that you could get from GSK with regard to COREG?

Stephen Willard

No, that was the last one. The $4 million is reflected in the net income number, but not in the cash number. The cash will be reflected in the second quarter. That's it for milestones from GSK. We'll just be getting royalties as the sales of the product continue.

Tom Weissenborn - Credit Suisse

Can you tell us anything anymore about any other additional milestones that you might get from Merck Serono?

Stephen Willard

I would love to but I can't, because the terms of that are confidential. We do have an excellent relationship with Merck Serono across more than just the product on which we got the EUR5 million in February. We asked them for the opportunity to disclose further information on a fairly regular basis. It is solely within their discretion. I think you hoped create the impetus to try to get as much out in terms of information through metrics and otherwise and that continues to be a top priority to try to get our partners to share more and more with you, the investors.

Tom Weissenborn - Credit Suisse

Can you tell us with regard to that, Steve, whether some of those milestones might be time-based like they are or like they were with GSK or achievement-based?

Stephen Willard

Virtually all of them are achievement-based with regard to the largest Merck Serono program.

Operator

Ladies and gentlemen, this concludes the question-and-answer session for today. Mr. Willard, I'll turn the call over to you for any closing remarks.

Stephen Willard

Certainly. Thank you very much. I would like to make a small personal comment. I will be giving the Q2 conference call by myself without Siân Crouzet in August because very happily she is expected to deliver a baby later this month. I would like to thank her for her dedication and being with us on this call. She is a fine professional. I wish her very well as she delivers her baby and returns to us as soon as she and the baby are ready.

I would also like to say that, while I think this is a very good quarter and it certainly shows continued progress, what we have done is follow a very careful plan that I have tried to lay out for you, our investors the past six quarters. This is not a particular event that was unusual because we were lucky.

We have been building a very strong diversified foundation. I think that the kind of results that we've explained to you this quarter are the result of a year-and-a-half's worth of work. We hope that that work will continue to provide excellent results as we go forward.

Thank you very much for your interest in Flamel Technologies and we'll speak to you soon.

Operator

The conference has concluded. Thank you for your participation. You may now disconnect.

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