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Targacept, Inc. (TRGT)

Q2 2009 Earnings Call

August 5, 2009, 5:00 pm ET

Executives

Don deBethizy - President and CEO

Alan Musso - VP, CFO and Treasurer

Geoffrey Dunbar - VP, Clinical Development and Regulatory Affairs

Analysts

Bret Holley - Oppenheimer and Company

Juan Sanchez - Ladenburg

Kim Lee - Wedbush Morgan Securities

Mark McKechnie - William

Presentation

Operator

Welcome to the Targacept's Second Quarter 2009 Financial Results Conference Call. I will now turn the call over to Targacepts' management.

Alan Musso

Thank you, John. I am Alan Musso, Targecept's Chief Financial Officer.

Before we get started today, I would like to remind you that some statements made, or responses given during this conference call constitute forward-looking statements, made under the provisions of the Private Securities Litigation Reform Act of 1995.

Forward-looking statements include without limitation, statements that are not purely historical in nature regarding: the progress, scope or duration of the development of TC-5214, AZD3480, AZD1446 or TC-5619, such as the size, design, conduct or objective of any clinical trial, the timing for initiation or completion of or availability of results from any clinical trial or the indications for which such product candidate may be developed.

The benefits that may be derived from any Targacept's product candidate; a strategic alliance, collaboration, licensing or other arrangement with respect to TC-5214; any payments that AstraZeneca or GlaxoSmithKline may make to Targacept; or Targacept's plans, expectations or future operations, financial position, revenues, costs or expenses.

Actual results may differ materially from those expressed or implied by forward-looking statements as a result of various important factors, including, without limitation, those described under the heading forward-looking statements in the press release that Targacept issued earlier today or under the heading, Risk Factors in Targacept's most recent Annual Report on Form 10-K and in other filings that it makes with the Securities and Exchange Commission.

Such forward-looking statements speak only as of today, and it should not be relied upon as representing Targacept's views as of any date after today. Targacept disclaims any obligations to update any forward-looking statements, except as required by applicable law.

I will now turn the call over to our President and Chief Executive Officer, Dr. Don deBethizy.

Don deBethizy

Good afternoon and thank you for joining us. Before I begin, let me mention that Dr. Geoffrey Dunbar, Targacept's Vice President, Clinical Development and Regulatory Affairs is also here today with Alan and me.

As you know, we have had quite a bit of exciting news to announce recently and we look forward to reviewing our progress and discussing our plans for the future. To begin, I will discuss the recent developments in our portfolio, then Alan will review our financial results for the second quarter ended June 30, 2009. And the three of us will be available to take your questions.

I will begin with TC-5214, a product candidate that is not part of our strategic relationship with AstraZeneca and GlaxoSmithKline. Last month we announced highly statistically significant top line results from a Phase 2b clinical trial of TC-5214 as an augmentation or add-on treatment in subjects with major depressive disorder, which I will refer to as MDD, who did not respond adequately to first line treatment with the anti-depressant Citalopram Hydrobromide.

Citalopram is a representative of selective serotonin re-uptake inhibitor or SSRI, a drug class commonly for major depressive disorder. Citalopram is marketed as Celexa in the United States.

Augmentation or add-on therapy represents a compelling therapeutic approach to help the million of patients with depression for whom currently available options are inadequate. In a landmark five-year study conducted by the National Institute of Mental Health, known as the sequence treatment alternatives to relieve depression or so-called STAR*D study, approximately 63% of participating MDD patients did not achieve remission following initial treatment with Citalopram alone.

With about two-thirds of an estimated 14 million American patients that still suffer with depressor symptoms, despite treatment, the unmet medical need is clear and the commercial opportunity is significant.

Our completed Phase 2b MDD trial was conducted at 20 sites in India and three sites in the United States. The study design involves two phases. In the open label first phase, subjects with MDD received first line treatment with Citalopram for eight weeks. Subjects who qualify either as non-responders or as only partial responders continued into the double-blind placebo controlled second phase.

These subjects received a flexible dose of either TC-5214 or placebo as add-on to continue Citalopram treatment for an additional eight weeks. The primary outcome measure from the trial was mean change from base line between the add-on 5214 group and the add-on placebo group on the 17 item Hamilton Rating Scale for Depression or HAM-D.

Secondary efficacy outcome measures included the assessment of depression, irritability, disability, cognition, severity of illness and global improvement. As we announced in mid-July the results were highly statistically significant in favor of TC-5214, on the primary and secondary outcome measures on an intent to treat basis.

Remarkably, the result on the primary outcome measure favored 5214 with the p value of less than 0.0001. We plan to present detailed results from the trial on October 15, 2009 at the Nicotinic Acetylcholine Receptors as Therapeutics Targets Satellite Symposium, which is scheduled to occur prior to the annual society for Neuroscience meeting in Chicago.

In the meantime Dr. Dunbar will be available later in today's call to respond to any general questions you may have about the trial.

Planning for further clinical development of TC-5214 is ongoing and we expect Phase 3 to be initiated in the second quarter of 2010, following end of Phase 2 discussions with the FDA and EMEA and production of clinical trial material. In parallel, we are active in discussions with multiple pharmaceutical companies with the goal of identifying a strategic partner who could help us optimize the global development and planned commercialization of our compound.

One last side with respect to 5214. Early in the second quarter we initiated an exploratory study of TC-5214 as an augmentation treatment for resistant hypertension. In light of the favorable outcome of the completed MDD trial and slow enrollment in the resistant hypertension study, we have made the decision to allocate resources to preparation for Phase 3 development in MDD and not to continue with the resistant hypertension study.

Lets now move on to discuss our other three clinical stage product candidates that are in cognitive disorders.

For our last several quarterly conference calls much of the attention has been focused on AZD3480 and I do not want the outstanding progress of that product candidate to be lost in the enthusiasm for our MDD trial results.

In the second quarter, we announced positive top line results from a Phase 2 study of AZD3480 in adults with attention deficit hyperactivity disorder or ADHD that we conducted with AstraZeneca.

The primary outcome measure in the study the Conners adult ADHD rating scale investigator rating evaluates the core symptoms of ADHD in attention and impulsivity. And the result indicated that our compound has the magnitude of affect comparable to what would be expected with stimulants, amphetamine and methylphenidate.

These drugs are the most often prescribed medications for treating ADHD, but have abuse potential and significant side affects that limit their desirability.

In contrast, AZD3480 has consistently shown a favorable side affect profile in clinical studies totaling about 1,350 subjects. And its preclinical and clinical profile to-date does not suggest that it will have abuse potential.

As we announced recently, AstraZeneca plans to conduct further development of AZD3480 including clinical studies to include both younger subject and adults and agreed to make a $10 million milestone payment, which we received last month.

For Alzheimer's disease, AstraZeneca is prioritizing development of AZD1446, compound that arose from our preclinical research collaboration and is currently in Phase 1 clinical development. AstraZeneca's development plans now provide two separate opportunities to reach the market and meet the needs of patients suffering from cognitive disorders, with product candidates, that act as the alpha4beta2 NNR.

You have heard me talk often about the unique breadth and of potential therapies to applications for the NNR mechanism which is certainly evident in the area of cognitive disorders.

In addition to the alpha4beta2 NNR, there are strong scientific evidence to support the roll of the alpha7 NNR in cognition. Our product candidate TC-5619 is highly selected for the alpha7 NNR.

We are continuing to plan for the expected initiation later in 2009, a Phase 2 clinical study 5619 in cognitive dysfunctions as schizophrenia or potentially one or more other conditions characterized by cognitive impairment.

The 5619 achieves proof-of-concept in the planned Phase 2 trial. AstraZeneca would have the right to license 5619 on the terms of our agreement, which provide for us to receive a 40 million fee and be eligible for substantial downstream success based milestones and royalties.

With the four clinical stage product candidates that I have touched upon today, we believe we are just scratching the surface of the potential of NNR Therapeutics. One of the things that distinguishes Targacept is the sustainability of our pipeline, fueled by our proprietary discovery engine that we call 10 tab.

We pursue preclinical programs in areas with blockbuster opportunities, such as Parkinson's disease, smoking cessation inflammation and obesity, and we fund these programs in various ways.

For example, we are eligible for substantial success based preclinical milestones in our alliance with GlaxoSmithKline across five therapeutic areas, which facilitates the advancement of promising programs that might otherwise be inactive.

When the opportunity arises we will also seek grant funding. I am particularly proud to note that grant that we recently were awarded by the well known Michael J. Fox Foundation for Parkinson's Research.

The grant is designed to fund preclinical research on the use of compounds that act on NNRs to address movement side effects or dyskinesias that are caused by the medication known as L-dopa.

L-dopa is commonly used to treat patients with Parkinson's disease and the dyskinesias can be as debilitating as the disease itself. We are certainly delighted to have earned the interest of this prestigious foundation.

In summary, our recent announcements regarding TC-5214 and AZD3480 reflect important milestones in our history and we look forward to reporting our progress in the remainder of 2009 and beyond. And now let me turn the call over Alan A. Musso, our Chief Financial Officer.

Alan Musso

Thank you, Don. Let me now review with you our financial results for the second quarter of 2009. We ended the second quarter with 73.1 million in cash, cash equivalents and short-term investments. In July 2009 after the end of the quarter we received a $10 million milestone payment from AstraZeneca, which will be recognized in the third quarter of 2009. We continue to expect that our current cash resources will be sufficient to meet our operating requirements at least through the first half of 2011.

The cash summary guidance assumes that the funds required for Phase 3 clinical development of TC-5214 will be obtained through a potential future strategic alliance, collaborations, licensing or other arrangement for TC-5214.

Turning to our operating results. We had a net loss of 9.7 million for the second quarter of 2009 compared to a net loss $6.8 million for the second quarter of 2008.

The increase to the 2009 period was primarily attributable to lower revenues derived throughout from AstraZeneca collaboration, as the AstraZeneca funded preclinical research winds down and from our GlaxoSmithKline alliance based on the timing of the achievement of preclinical milestone events.

Our net operating revenues totaled 2.8 million for the second quarter of 2009 compared to 5.2 million for the second quarter of 2008. The lower net operating revenues for the 2009 period were primarily attributable to a decrease of 1.5 million in collaboration, research and development revenue, and a decrease of 715,000 in milestones and license fees from collaborations.

Our research and development expenses totaled 11 million for the second quarter of 2009 compared to 10.5 million at second quarter of 2008.

The higher research and development expenses for the 2009 period were principally attributable to an increase of 596,000 in costs incurred for third party research and development services in connection with our clinical stage product candidates with the highest components being costs incurred for TC-5214 and an increase of 215,000 in costs incurred for third party research and development services in connection with our preclinical programs.

These increases were partially offset by a decrease in supply and other non-program specific research and development costs, resulting from planned budget reductions.

Our general and administrative expenses were 1.4 million for the second quarter of 2009 compared to 1.9 million for the second quarter of 2008. The lower general and administrative expenses for the 2009 period were principally attributable to decreases in professional fees, patent-related costs and travel-related expenses.

Our net interest income was 201,000 for the second quarter of 2009 compared to 631,000 for the second quarter of 2008. The decrease was attributable to lower short-term interest rates and a lower average cash and investment balance.

Taking into account our financial results today, we announced earlier today that we are updating our financial guidance for 2009.

Based on current operating plan, we now expect that our net operating revenues for 2009 will be in the range of 22 to 23 million. Our operating expenses for 2009 will be in the range of 48 to 52 million. And at the end of 2009 we will have at least 59 million in cash, cash equivalent and short-term investments.

Now let me turn the call back over Don.

Don deBethizy

Thank you Alan, and thanks again to everyone for joining us on today's call. This has been, its certainly been in the exciting time for Targacept, highlighted by the positive results for TC-5214 in MDD and ACD3480 in adults ADHD as well as AstraZeneca plans to proceed with the development of multiple NRR Therapeutics and a $10 million payment to us.

As we move further in to the second half of 2009, we remain firm in our conviction in the potential of our portfolio to build health and restore independence for patients. With the cash position that as Alan mentioned we project, should take us at least through the first half of 2011, we are well- positioned to execute our business plan.

With that, we would now like to open the call up for question.

As I mentioned earlier, in addition to Alan and me, Dr. Geoffrey Dunbar, our Vice President, Clinical Development and Regulatory Affairs is here with us. Operator?

Question-and-Answer Session

Operator

(Operator Instructions).Your first question comes from the line of Bret Holley with Oppenheimer and Company.

Bret Holley - Oppenheimer and Company

Maybe you cannot answer this, but I am going to ask it anyway. So having had some time to just the TC-5214 data, how do you think it compares to Phase 2 data or you know kind of, similar data for Abilify and Seroquel, both on efficacy and I think almost as importantly on safety, just generally?

Don deBethizy

Bret, it is good to hear your voice. We have been talking about this for sometime and the results are strong, and I think I will ask Geoffrey just to comment on his perspective on that.

Bret Holley - Oppenheimer and Company

All right.

Geoffrey Dunbar

Yes. thank you, Don, Well, first I must point out that we have no head-to-head data against our …. So we cannot make any definitive statement. However, if you look at the actual separation between drug and placebo for the respective trials, we certainly would expect to be as good if not better in both of those medications. And vis-à-vis the tolerability, we sure thought that it would be an important factor, in this trial, the adverse event rates were much lower than we saw in the earlier TRIDMAC trial and certainly with dizziness, headache and constipation being the most frequent adverse events.

These are all of a very benign nature and would compare very favorably to the major side effects that occur with the atypical anti-psychotic, obesity, metabolic syndrome, diabetes, Type II diabetes and extrapyramidal problems. Though overall we think we are going to be good is now better in terms of efficacy and much better in terms of tolerability from safety.

Bret Holley - Oppenheimer and Company

Great. And have you gotten any additional information on the medical history of the one patient that was coded procedure, I guess the Indian patients in the trial?

Geoffrey Dunbar

We have not been able to get any further information other than that we already have from the investigator in India. I would like to remind everybody that volunteer patient was also receiving Citalopram as well as our molecule. So, it is not at all certain that there is any direct causality with our product. There is also in fact some uncertainty even around the diagnosis.

The event was never witnessed by a medical professional. The patient was never seen again by our investigator and the history was related by his wife or his wife or his daughter I beg your pardon and there was inconsistencies between the two stories.

So, there are number of mitigating factors. At this moment in time we are not unduly concerned about this event and our position is to monitor carefully during Phase III development.

Bret Holley - Oppenheimer and Company

So, I guess at this point there is not really any additional information that you can get or are you seeking any additional information at this point?

Geoffrey Dunbar

We are certainly trying to get this -- yes we are actively engaged in trying to get further information. You are quite right.

Bret Holley - Oppenheimer and Company

Okay. I guess my last question is regarding potential partnership. How you might think about -- obvious there are different deals furnished.

Would you potentially think about some kind of co-promotion or co-development right going forward or you thinking more in terms of a straight kind of royalty deal?

Don deBethizy

Well as you know there is always a debate about what is the best way to commercialize a product like this. After we saw the results and the strength of the results, we recognize that there was a significant global opportunity.

So ideally, we would like to have a partner. We want to play an active role with that partner to ensure that the product is developed in such a way that we can derive the greatest benefit to patients.

So we will be looking at a variety of structures and working through that how best to do that, but one of the core principles to that will be to make sure that our experience with this mechanism of action and certainly the organizations experience with depressions specifically that we play essential role in the development of the molecule.

Bret Holley - Oppenheimer and Company

Sorry. One other question I just wondered on manufacturing, obviously a small molecule does this appear on face value like that would be too much about a challenge or is this a complex census as far as the number of steps is that something we should be at all concerned about?

Don deBethizy

No, this is a classic small molecule and is a relative straight forward census.

Operator

Your next question comes from the line of Juan Sanchez with Ladenburg. Please, proceed.

Juan Sanchez - Ladenburg

I have a couple of questions, the first one is about your thoughts about the level of maturity of this market outside the United States, I mean the concept of add-on therapy how receptive do you think Europe is and the rest of the world?

Don deBethizy

Thanks, Juan. How are you doing? It is good to hear you on the call.

Juan Sanchez - Ladenburg

Yes.

Don deBethizy

We read your coverage with interest. Thank you for doing such a thorough job with the description of this asset. We are as you know, there has been this landmark study that I mentioned in the script called the STAR*D study. And from that, there was a lot of focus drawn to the value of add-on therapy and that was in fact a conclusion from those studies.

Then, as you also know, it is an emerging market, in the sense that there is clinical research underpinning and now with Abilify and BMS with Abilify getting labeling in this area it is a developing market opportunity.

We have already described the unmet need from the STAR*D. It was described as 63% of patients still experience depressive symptoms after their first course of therapy. So I think there is a spreading awareness, as I talk to investors and key opinion leaders and people we recognize that the people are just getting more engaged in this.

So, I think it is an emerging area, I think it is an important area. There was sort of an assumption for quite sometime that it was a – that it was a treated market and that lot of the serotonin reuptake inhibitors were going generic. But I think the STAR*D study really drew attention to the fact of the limits of the current therapy.

Juan Sanchez - Ladenburg

The second question is what are physiological basis for this drug mecamylamine do not have any hypotensive effects in normal tensive individuals.

Don deBethizy

I think what we have observed in normal tensive people that normal compensatory mechanisms are acting and that we do not see a response that lasts in people and I will let Geoffrey comment a little bit more because he has been actively involved in this over quite some time.

Geoffrey Dunbar

Yes, again, thank you, Don. Absolutely right. What happens we believe when we give the [inaudible] mecamylamine to help a relatively healthy subject vis-à-vis with their cardiovascular system, the compensatory mechanism involving mainly the baroreceptors.

These are the so called pressure receptors or baroreceptors in the aorta and the carotid sinus quickly compensate for any hypotensive action and body will see an increase in blood pressure and there is a slight increase in pulse rate, which causes that net effect to be negligible.

Don deBethizy

The other point one is that these doses are much lower. The doses for major depression are much lower than the doses that were originally used for mecamylamine which is on the market as you know as an antihypertensive starting in the 50.

So, we have done extensive cardiovascular monitoring. We have confirmed that we do not see this response at the dosages we are using in normal tensive people.

So we are quite comfortable with the fact that by lowering the dose, picking the enantiomers that had most of the antidepressant activity, and picking the enantiomer that had lower toxicity actually, that we are actually seeing a shift in the side effect profile to headache and dizziness as being the most frequently reported adverse events which are the common with CNS drugs, constipation moving down to third and no effect on the cardiovascular system.

Juan Sanchez - Ladenburg

Do you see similar irritability resource in the [inaudible] trial as well?

Don deBethizy

Yes, a very robust effect on symptoms of this irritability, yes.

Juan Sanchez - Ladenburg

In both trials right, in this one I think…

Don deBethizy

That is exactly right. And I think you make an important point not only in terms of effectiveness on irritability, but just general anti-depression activity, we have replicated this result on two occasions which really does dramatically de-risk on this approach.

Operator

(Operator Instructions). Your next question comes from the line of Kim Lee with Wedbush Morgan Securities. Please proceed.

Kim Lee - Wedbush Morgan Securities

Well its good see your pipeline candidates advancing and the main question I had was for TC-5214. I know that you are going to have discussions with the EMEA as well as with the FDA on this program. My question is what are your plans if pursuing a European filing?

Are you planning to fund EU trials at the same time as you are running trials in the US or does this development plan is a contingent on partners as well on their plans?

Don deBethizy

It is a good question Kim. Just to remind everyone, we had a Type C meeting with the FDA back in 2007 as we were developing this mechanism of action on these opportunities. So, we got early feedback from the FDA in terms of broadening our label and making sure that we were looking at this more broadly and hindsight now, we now know that they were heavily involved in Abilify and had quite a bit of insight.

We also recognized that the opportunity is global and as we indicated in our script it is why it would be ideal for us to have a global pharmaceutical partner to help us develop.

We also recognize that we need to keep driving forward to a Phase 3 start and that is our primary objective and we will be interacting both with the FDA and the EMEA and with plans to do both US and European trials. So, Geoffrey you have any other further comment on that?

Geoffrey Dunbar

No, I think, our planning is like a global development which will involve both the US, Europe and Japan. Obviously, though, importantly we will have to have these meetings with the regulators as to how to confirm what the plan would like. But again, as Don mentioned, we have a pretty good roadmap, we have access to the Abilify plan development program, also the [inaudible] program. And so that gives us a good idea as to the kind of route we need to follow.

Operator

Your next question comes from the line of [Mark McKechnie with William].

Mark McKechnie – William

Just had a quick question about your thoughts maybe your philosophy behind financing. It seems that many of your peers at the moment that have recently issued positive data has subsequently gone out and raised capital and it is seems like the financing window is currently open. What are your current thoughts about raising additional money in the capital markets?

Don deBethizy

Lots of people have been pretty hunkered down for quite some time as we went from September of '08 and with the market. So we had no plans to finance, we made some changes in our burn rate at the beginning of the year. Those were reflected in some of the descriptions that Alan provided and we are actively involved in interacting with partners around this asset.

We have had a great outcome with AstraZeneca and then taking on the development of our cognitive disorder clinical candidate. So, we have no need right now to finance. And with that I will turn it over to Alan for a little bit further description.

Alan Musso

There has been other important plans. We entered the quarter, the second quarter with 73 million, we received 10 million after that and we got outstanding result on the TC-5214 MDD trial. So we feel really good about all the development.

We also have a good relationship with AstraZeneca and Glaxo. Over the last few years, they have provided us with a over 110 million of cash [inaudible] as well AstraZeneca funding substantial development.

So it really does put us in a good position. So I think we are well capitalized now, feel very good about our ability to support our business with our current financial resources.

Operator

(Operator Instructions) You have a follow-up question from the line of Juan Sanchez with Ladenburg.

Juan Sanchez - Ladenburg

First question, how is the agreement with Glaxo progress and when should we expect the next inflection point in this collaboration? And the second question is how are this $10 million that you just receive from AstraZeneca going to be accounted for?

Don deBethizy

Well, I will let Alan take the first one on the $10 million.

Alan Musso

Yes, we believe that all the revenue recognition criteria have been net to $10 million and expected to be recognize as revenue in fall in the third quarter.

Don deBethizy

So then I will go back to the GSK question. Our GSK collaboration provides us an opportunity to move these five therapeutic areas forward. We have really focused in on smoking cessation and obesity as well as Parkinson's and are making good progress there.

We have identified and have been paid for compounds that have moved into preclinical safety assessment. And we are actively involved in that.

So what we have projected is that if things progress as they have historically that we could be seeing some kind of outcome from that at the beginning of 2010.

Operator

This concludes the question and answer portion of the call. I would like to hand the call back to Dr. deBethizy for any closing remarks.

Don deBethizy

Again, thank you all for joining us this afternoon and we look forward to speaking with you again soon. So thank you very much.

Operator

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

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