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Flamel Technologies S.A. (NASDAQ:FLML)

Q2 2009 Earnings Call Transcript

August 6, 2009 8:30 am ET

Executives

Steve Willard - CEO

Analysts

Lisa [ph] - Ladenburg Thalmann

Peter Butler - Glen Hill Investments

Lauren Migliore - Morningstar

Operator

Hello, and welcome to Flamel Technologies' second quarter 2009 earnings conference call. All participants will be in listen-only mode for this event. (Operator instructions) After today’s presentation, there will be an opportunity for you to ask questions. An operator will give instructions on how to ask questions at that time. Please note this event is being recorded. I would now like to turn the call over to Steve Willard, CEO. Please begin your presentation.

Steve Willard

Thank you very much, Nicky. Good morning, ladies and gentlemen. I’m very pleased to be speaking with you as I believe this has been a very strong quarter in terms of development of our partnerships, advances in our science, and improvement in our financial position.

We open, as always, with the forward-looking statement language, which is set out at the conclusion of 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 as they are directly applicable to every element of this call.

Our second quarter results demonstrate the success we are having in executing on our diversified business model, and improving the competitive advantages of our technology platforms. During the second quarter, we executed on five key elements. One, we signed agreements with Baxter Pharmaceuticals to formulate longer acting intravenous formulations of certain blood factors. Blood factors currently have sales in excess of $5 billion a year.

Number two, we also signed two further Medusa agreements during the quarter. One is to improve an already marketed hormone. And the other is to deliver a novel molecule being developed for the treatment of pain.

Three, we now have 15 Medusa programs under agreement, and four agreements using our Micropump platform. Our Medusa programs to develop already marketed molecules currently encompass molecules comprising $14 billion of 2008 revenues. Currently, marketed molecules comprise six of our 15 Medusa partnerships, the others being new chemical entities or NCEs. We believe that the significant advantages our technologies provide can enable our partners to capture market share versus competing formulations of the same drugs, and even to expand the markets they serve.

The fourth element of success is the data from our ongoing projects, which continues to be quite positive. We are especially pleased to report that we have generated data during the quarter that further demonstrate some of the new advantages we have recently made on our Medusa and Micropump platforms. I will discuss some of these new applications later in the call as these are opening large and growing new markets for our technology.

And finally, fifth, our cash and marketable securities grew once again during the second quarter, this quarter by 6 million. This is the fourth consecutive quarter that we have increased our cash and marketable securities in constant currency terms, meaning in euros. Given exchange rates, it is the third quarter where our dollar levels have grown as we hold our currency, as I said, in euros.

The 2.5 million euro, which would be $3.5 million technology access fee that we received from Baxter, is not part of our Q2 cash number. We have received it in the third quarter, and it will be recognized in our third quarter balance sheet figures.

It has been two years since we learned of the controversy surrounding Avandia, and the consequences that that had on the COREG CR launch. In that time, we have built a strongly diversified pipeline of projects with leading companies in the industry, such as Merck Serono, Wyeth, Pfizer, Baxter as well as numerous others. These projects are being undertaken with seven of the top 20 companies in the world. We are working with three companies on multiple projects because we have built strong relations based on the solutions that we provide.

The recognized value of our platforms is the reason we have actually improved our balance sheet in the last two years. We still have no debt and no convertibles. We are stronger now than at any time in the history of Flamel, financially, and more importantly, scientifically.

Our pipeline is greater than it has ever been. And I think it should grow stronger still based on the discussions we’re conducting and the science advances we have made.

Our Principal Financial Officer, Siân Crouzet, I am very pleased to report, gave birth last month to her son, Anthony [ph]. Congratulations, Siân. While she is on maternity leave this quarter, I will take over her role in presenting the financial results.

There are three major elements of our results for the second quarter of 2009. Our license and research revenues are an important indicator for the growth of the company’s pipeline and our prospects for the future. These are the revenues we are generating, as we work to develop new projects with our partners. They grew year-over-year during the second quarter by over 37%, and sequentially versus the first quarter of 2009, excluding the milestone we received from GSK, by about the same amount.

This reflects a substantial increase in the amounts paid by our partners, to compensate for the scientists who work on our many projects. And we have added additional partnerships in the second quarter on which work is just beginning to commence. We expect this growth to continue.

We have hired an additional nine scientists so far this year to handle the extra volume of work we currently have. But they are net contributors to our bottom line as we are paid significantly in excess of their cost by our partners.

Of our R&D revenues, the major contributor this quarter was Merck Serono, with whom we are working very well and making good progress. Other partnerships are also progressing well and are expected to be in human clinical trials this year. We are already in human trials with partnered molecules today.

The growth in our revenues is, to me, quite strong. And we expect this trend to continue. Significantly, it is also well diversified between both partners and projects. And we expect continued growth in both -- in the months to come.

Similar trends are seen in our six-month numbers, reflecting significantly increased R&D income from partners, due to our increased number of partners and projects. COREG royalties were essentially flat, while our production revenues diminished somewhat compared to a year ago. We have been told by GSK to expect higher production for the remainder of the year.

With respect to expenses, we held expenses relatively flat. As I mentioned earlier, we have hired nine new scientists, which increased our salary line by about $700,000. But they are fully paid for by our partners.

We also increased our clinical studies and raw materials purchases by approximately $800,000. But a portion of that will be reimbursed by our partners. The remainder is related to some of the new applications of our technologies, which we have been developing. We continue to maintain and demonstrate containment of our operating costs. And SG&A is once again down, compared to a year ago period.

Finally, financially, we are obviously quite pleased with our cash position. This represents the third consecutive quarter in which we have increased our cash in dollars. In euros, the currency in which we operate, this is the fourth consecutive quarter of cash growth. We are at approximately the same cash level as two years ago, which means that we are funding all our operations, both for partners and our internal development through our partners’ and grant income.

We have no debt, a relatively small number of shares, and in an environment in which many companies in the biotechnology and specialty pharma industry are under significant financial pressure. We are pleased to be financially strong and growing, and able to focus on serving our existing partners, expanding our existing relationships, and creating new ones, and creating significant new applications for our technology platforms.

Of the three new relationships we have signed this past quarter, we are obviously extremely pleased by our new relationship with Baxter. Baxter is the leading company in the treatment of hemophilia and other blood disorders. These are currently given intravenously.

Although we have existing partnerships with regard to intravenous molecules, this new relationship allows us to disclose the application of our Medusa technology to this important set of therapies, and to highlight our relationship with one of the very top companies in the field.

As we have announced, Baxter has paid a 2.5 million euro access fee, that’s about $3.5 million in current exchange rates in dollars, to Flamel, in recognition of our work over the past two years with drugs that are currently given by intravenous formulation. This is in addition to the usual quarterly payments from Baxter to cover our scientists going forward, plus the milestones and royalties we expect to achieve as these products move forward.

Speaking generally, with regard to intravenous therapies, there are two major ways in which our Medusa technology can enhance these types of drugs. One is to allow formulations to remain in the blood longer and potentially to be more effective. The other is to seek alternative means of administration.

I cannot be more specific about how we do this as our patent is still being filed and processed. But these are the areas in which we seek to use our formulation technology with respect to drugs currently administered intravenously.

Once again, we are pleased to be working with Baxter, the leader in blood factors, which is more than a $5 billion per year industry as well as in the intravenous field generally, which has annual sale estimated to be in excess of $100 billion.

I would also like to highlight data we have obtained on several other factors of our Medusa platform, which we have developed and are beginning to make available to our partners. The first of these regards to solubilization. Many therapeutic agents are very poorly soluble or insoluble. This has made it difficult or impossible to bring many promising products to market simply because they cannot be properly introduced into the body.

We have now demonstrated with a variety of molecules that Medusa can increase the solubility of poorly soluble peptide, proteins, and large and small molecules by dramatic amounts. We have been able to increase solubility in certain molecules by many thousands of times. Such increase in solubility can mean the difference between a promising pre-clinical molecule being developed or being dropped by a large pharmaceutical company.

We have also separately made strides in delivering more than one therapeutic agent on the same Medusa nano carrier. Based on our work so far, it seems that we may be able to deliver four or five therapeutic agents on a single polymer. You will recognize that this is the equivalent of combination therapies, which have always been an advantage with our Micropump technology, but which now appear to be possible with our Medusa technology as well.

A third advantage we are developing is in stabilizing therapeutic agents prior to their delivery. Medusa thus has advantages even before the formulation is introduced in the patient with respect to many promising therapies. We also have new data that indicate we can use Medusa to prevent aggregation in antibody formulations, which is another significant formulation problem. Antibodies are another huge group of therapies, which are used to treat a variety of serious diseases.

And finally, we continue to progress in our efforts with other new initiatives, which we are working to patent in additional areas of drug delivery. These advances continue to drive the success of our strategy to leverage the platform across multiple indications and classes of molecules with multiple partners.

While we have, to date, only licensed our technology on a molecule-by-molecule basis, we are also willing to explore granting use of technology on multiple molecules or groups of molecules, if we feel we can obtain fair value for our innovation, our technology’s potential contribution to a variety of products, and for the benefit of our shareholders.

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 the backlog of projects in discussion and negotiation as well as with 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.

And I would now be pleased to take your questions.

Question-and-Answer Session

Operator

Thank you. We will now begin the question-and-answer session. (Operator instructions) We will pause momentarily to assemble our roaster. Our first question comes from Matt Kaplan of Ladenburg Thalmann. Please go ahead.

Lisa - Ladenburg Thalmann

Hi, this is Lisa [ph] now. I’m sitting in on the call for Matt Kaplan. A couple of--

Steve Willard

Good morning.

Lisa - Ladenburg Thalmann

Hi, good morning. A couple of questions, as you mentioned, the cash position has been going, for a couple of quarters, consecutively. So I’m wondering if you see this trend counting in the future, where you’re going with that.

And then also, can you give me an update on your current partnership as well as your visibility to new partnerships? And from your Baxter deal, it also seems like there might be new applications of Medusa in the works. Can you provide a little bit more color on that?

Steve Willard

Okay. Three questions there. I will try to remember all three and answer them in order. If you’ll prompt me, I would be a grateful for it.

First, with regard to our cash position, I think we have clearly demonstrated over the last four quarters our ability to actually not burn cash but earn cash. While we cannot guarantee that we will be able to continue this for many, many quarters to come on a quarter-by-quarter basis, I think the trend is quite clear that we are paying our bills, that we are building cash, and that we have absolutely no need for external financing. We have the ability, through our partnership model, to not only cover our worker, our partners, our important internal development, and also increase the amount of cash that we have available for our company.

With regard to partnerships, I’m very pleased that we signed up four agreements this past quarter. I anticipate additional agreements in the remainder of the year. We have tried to average about two new relationships a quarter, and that tends to be our goal obviously.

We are seeking relationships like the Baxter relationship, where we received about $3.5 million for the opportunity of Baxter to work with us. Obviously, we think that is a strong recognition that big pharma understand the value our technology creates to the extent that people are willing to pay to work with us.

We’re in discussions with a variety of companies and I see increase interests in new partnerships rather than any diminution of interests. So I would expect that the trend with regard to new partnerships will continue and perhaps grow.

And finally, with regard to new applications, if I remember correctly, that that was the third element of your question--

Lisa - Ladenburg Thalmann

Yes.

Steve Willard

Yes. Some of the -- some of our new developments, I did not talk about what we are doing especially with Baxter because Baxter issued with us a joint press release a couple of weeks ago which said as much as Baxter would like us to say. But the fact that we are innovative and have developed prior to our relationship with Baxter, very, to my mind, impressive, technology with respect to intravenous molecules, was obviously, I think, a major factor in their selection of Flamel as their drug delivery provider.

Lisa - Ladenburg Thalmann

Okay. Thank you very much

Steve Willard

Thank you for your questions.

Operator

Thank you. Our next question comes from Peter Butler of Glenville Investments.

Peter Butler - Glen Hill Investments

Good morning.

Steve Willard

Good morning, Peter.

Peter Butler - Glen Hill Investments

I have a number of questions and I can back in the queue if we run out of time on the first couple--

Steve Willard

Okay.

Peter Butler - Glen Hill Investments

Hopefully.

Steve Willard

Why don’t we do a couple and then try to--

Peter Butler - Glen Hill Investments

Yes.

Steve Willard

Give some other people a--

Peter Butler - Glen Hill Investments

Fine.

Steve Willard

Chance and then we’ll come back to you.

Peter Butler - Glen Hill Investments

Thank you. What were the moving, the big moving parts in the cash generation in the quarter, it’s -- without a cash flow statement, we don’t have too much of a clue on what they are.

And could you discuss what they were and what is the outlook for those pieces plus whatever hopes in the second half? And how do you see the cash flow looking in the third and fourth quarters?

Steve Willard

Sure. We’re always -- what we have always done in nine years that I’ve been with Flamel is we try to give an information in the call. And I went through each of the three lines of the income statement in my remarks this morning. We published a 6-K with the balance sheet after the close of the quarter, and there will be information there with the full balance sheet and that sort of thing.

Basically, it says -- I said before, I think we are seeing increases in the money we are receiving from partners, we are carefully controlling our cost, and I think going forward while there can be no certainty quarter by quarter, the fact that we’ve been able to increase our cash for, in Euros, for the last four quarters consecutively, suggest that we are actually delivering pretty well on not burning cash and in fact, gaining cash. And I don’t see right now any change in the way our company is operating and so I’m very optimistic for the quarters to come.

But with regards to the balance sheet, those are provided as part of the 6-K. I don’t think there’s anything particularly extraordinary you’ll see in that. But on each conference call, if you wish to talk about the prior 6-K, I’m always glad to take those questions. But right now, 6-Ks have to go through the auditors and whatever and they come out after our conference calls.

Peter Butler - Glen Hill Investments

I’m still in the dark on where the cash came from. You lost on the net income line, depreciation is very -- not very much though hopefully the answers are good things like you could cite some of the pieces of the partner income coming in. And hopefully the answer is not -- you don’t have a bad answer that the cash flows do the selling the office building or (inaudible) inventories, or whatever.

Steve Willard

The answer is not that we have sold, we have not sold anything. We have not reduced our inventories. It is public information that the GSK milestone of $4 million came in the second quarter. I announced that on the first quarter conference call and told the world that in the second quarter we’d be receiving $4 million of cash from GSK. That $4 million of cash is in that number.

I announced today that the $3.5 million upfront from Baxter is not in the second quarter numbers and will be in the third quarter numbers. So it’s a positive thing, to my view, like the $4 million from GSK, and it most certainly is not due to selling any asset of any kind, and not due to any reduction in inventory. And I’d invite you to take a look at the 6-K and I’ll be glad to discuss it.

Operator

Thank you. Our next question comes from Lauren Migliore of Morningstar. Please go ahead.

Lauren Migliore - Morningstar

Good morning. Thanks for taking the question.

Steve Willard

Good morning, Lauren, pleasure to have you on the call.

Lauren Migliore - Morningstar

Thanks. I jumped on the call actually a little late, so I apologize if you already covered this. But could you give us a brief update on the proprietary canvassing on pipelines, specifically Interferon-Alpha and the long-acting basal influence? What’s the development status of these products? Is it still the only case that you won’t be advancing these drugs without a partner?

Steve Willard

It is still the case that we will not spend further money on these projects until we have a partner. It is my expectation that we will announce shortly that we will go into phase two with regard to Alpha-Interferon, but not using Flamel’s money. So I expect that we will be able to announce in the relatively near future a phase two on Alpha-Interferon, which will not involve any payments by Flamel, but will involve other people’s money. I think that will be significant for a variety of reasons.

First of all, you will recall that with regard to our two-week data, in the second week we saw a statistically significant reduction in viral load in a sub-group of the Type-1 non-responders. We believe that that effect could be cumulative. And so 12-week data would be very important to a partner in order to get full value for that product.

We also saw significant reductions across the board in side effects, particularly in white cell disorders, which are very serious element. I am very excited about the possibility of being able to do a 12-week study with other people’s money. Again, I really want to stress, not Flamel’s money, but other people’s money. A 12-week study on that, both with regard to that product and to have a 12-week data with our Medusa technology, which could have implications across the other elements of our portfolio.

With regard to insulin, we are in discussions, but there’s been no particular movement since our last conference call. And I don’t want to -- while we continue to work there again in the same way that the offers on share on, we will talk with partners, we will seek other people’s money, and we will not use our own money to take those forward until and unless we have support from the outside.

Lauren Migliore - Morningstar

Great. Thanks so much.

Steve Willard

Thank you for your question.

Operator

(Operator instructions) We have a follow-up question from Peter Butler of Glenville Investments.

Peter Butler - Glen Hill Investments

Okay. Again--

Steve Willard

Actually, that’s Glen Hill Investments. Right, Peter?

Peter Butler - Glen Hill Investments

Glen Hill, yes.

Steve Willard

Yes, I didn’t want anyone to think it was Glenville [ph]. It’s Glen Hill.

Peter Butler - Glen Hill Investments

Well, whatever. My lemonade stand’s here.

Steve Willard

Okay.

Peter Butler - Glen Hill Investments

I guess you guys have noticed that your stock has been looking like a (inaudible) in the last three weeks despite the stock market having one of their best three, four weeks in history. Why isn’t, in your opinion, why isn’t your management story resonating with investors? And what can we do about it? It’s pretty frustrating to see the market go up and our favorite stock sitting there looking at us?

Steve Willard

I certainly care very much about how we do in terms of stock performance because I care the shareholders who are the investors and the owners of our company. My primary focus, obviously, has to be delivery of excellent results, both scientifically in terms of partnerships and in terms of financial results. And I think we have done those things.

Our stock took a significant hit as a result of COREG not meeting the expectations that Glaxo had set for it, but we have rebuilt our company. Our stock is up about 100% from an admittedly low level at the beginning of this year. Our goal is, as time permits, to try to get this story out to as many people as possible because we believe that with our success with partners, our success with our science, and our financial success, we really deserve the attention of investors.

Operator

Thank you. At this time we show no further questions. I would like to turn the conference back over to Mr. Willard for any closing remarks.

Steve Willard

Thank you very much, Nicky. We are grateful for your participation in August to listen to the very significant events that the Flamel team, I think, has accomplished in the second quarter. I’m very excited about what we’ll be able to accomplish for the remainder of the year. We will be working very diligently to bring many of these new innovations to partnerships as we move with our existing partnerships to try to bring products to market. We very much thank you for your interest in Flamel Technologies and we will speak to you again soon.

Operator

Thank you. The conference has now concluded. Thank you for attending today’s presentation. You may now disconnect your lines.

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