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Executives

August J. Moretti – Senior Vice President and Chief Financial Officer

Thomas King – President and Chief Executive Officer

Analysts

Ted Tenthoff – Piper Jaffray

Jason Kantor – RBC Capital Markets

Alexza Pharmaceuticals, Inc. (ALXA) Q3 2009 Earnings Call November 9, 2009 5:00 AM ET

Operator

Good afternoon, everyone, and welcome to the Alexza Pharmaceuticals 2009 third quarter financial results conference call. (Operator Instructions).

I would now like to turn this afternoon’s conference over to August J. Moretti, Senior Vice President and Chief Financial Officer of Alexza.

August Moretti

Welcome to today’s conference call. Before we get started, I’d like to remind you that the matters discussed on this call contain forward-looking statements that involve and uncertainties including those related to the potential results of future clinical development, our ability to commercialize products, the timing of the commercialization of such products, and our projected revenues, expenses, and cash requirements. Actual results may differ materially from the results predicted, and recorded results should not be considered an indication of future performance.

These and other risk factors are more fully discussed in our annual report on Form 10-K which we filed with the SEC in March and our quarterly report on Form 10-Q which we filed with the SEC earlier today, most particularly under the caption of risk factors in both reports. Alexza disclaims any obligatin to update or revise any forward-looking statements made on this call as a result of new information or future development.

As a reminder, Alexza’s policy is to only provide guidance on product candidates and corporate goals for the future one to two fiscal quarters and to provide update or reconfirm guidance only by issuing a press release or filing updated guidance with the SEC in a publicly accessible document. Clinical guidance is as of today, November 9, 2009, and financial guidance relating to the company’s current cash, cash equivalents, and investments is as of September 30, 2009.

I’ll now turn the call over to Tom King, President and CEO of Alexza.

Tom King

I would like to thank and all of our stockholders for the ongoing support and confidence you have shown in Alexza. We look forward to these conference calls. We’re going to update you on Alexza’s progress and results. I’m going to open this conference call with a brief update on operations thus far in 2009 and then provide a summary of the current status of AZ-004. I will then pass the call back to August Moretti to review the third quarter financials, and after that I will have closing comments, and we will open up the call for Q&A.

Our efforts in 2009 have been primarily focused on the clinical, non-clinical, regulatory manufacturing, and quality systems work necessary to move AZ-004, our lead product candidate, to an NDA filing. We remain very much on the timeline we outlined at the beginning of the year and continue to protect our AZ-004 NDA filing for early 2010.

As a reminder, Alexza is developing AZ-004 for the acute treatment of agitation in patients with schizophrenia or bipolar disorder.

In September 2008 and December 2008, we reported strong positive results in our pivotal studies which were phase III efficacy studies. In addition to our corporate news releases, data from these two studies have been presented at the 2009 APA Annual Meeting in May in San Francisco and most recently at the 2009 US Psychiatric and Mental Health Congress which was held last week in Las Vegas. Scientific publications of these data are in progress, and we look forward to seeing peer-reviewed publications of the AZ-004 data in 2010.

During the third quarter, we completed all of the planned clinical work for our AZ-004 NDA. Notably, we completed the enrolment and the data analysis of the remaining AZ-004 non-pivotal safety and NDA supporting studies. These studies were a pulmonary safety study in subjects with chronic obstructive pulmonary disease or COPD and a pulmonary safety study in subjects with asthma.

For the COPD study, we completed a phase I placebo-controlled study in 53 subjects with predominantly moderate to severe COPD. For the asthma study, we completed a phase I placebo-controlled study in 52 subjects with mild-to-moderate persistent asthma.

The primary aim of these two studies was to assess the pulmonary safety of AZ-004 in these specific populations. Both studies employed double-blind parallel group designs. In each study, subjects were given two doses of Staccato, either Staccato placebo or 10 mg Staccato AZ-004. Doses were administered 10 hours apart.

Spirometry testing and other safety assessments were performed several time points up to 24 hours after the second dose. The primary safety measure was FEV1, also known as the forced expiratory volume in one second, which is a standard test of lung function. Decreases in FEV1 versus baseline, respiratory symptoms, and the use of quick relief bronchodilators occurred in both treatment groups, but were more frequent in each study group after treatment with AZ-004 as expected. There were no serious or severe respiratory adverse events. All respiratory symptoms developing after treatment were either self-limiting or readily managed with an inhaled bronchodilator.

We have now completed the five planned non-pivotal safety and NDA supporting studies for the AZ-004 NDA. This is a profound accomplishment in just the first nine months of 2009. We believe that these new data along with the data from our other efficacy and safety trails conducted with AZ-004 adequately demonstrate the safety and efficacy of AZ-004 for the proposed indication for AZ-004 NDA. We have also previously reported that we completed our AZ-004 pre-NDA meeting with the FDA in July 2009. To reiterate, we remain firmly on track for our AZ-004 NDA submission in early 2010.

Now I’m going to turn the call back over to August for a review of the financials for the third quarter of 2009 along with a review of the completion of the acquisition of Symphony Allegro in August and our recent private placement financing which we closed in October.

August Moretti

Good afternoon everyone. I would like to summarize the financial information that’s included in the Form 10-Q for the quarter ended September 30, 2009, which was filed earlier today with the SEC.

Alexza reported a net loss of $12.4 million for the quarter ended September 30, 2008, and a net loss of $36.3 million for the nine-month period as compared to a net loss of $20.8 million and $59.1 million for the comparable periods of 2008.

We did not recognize any revenue in third quarter of 2009, and we recognized $9.5 million of revenue in the nine-month period. We announced in January 2009 the mutual termination of our agreement with Endo Pharmaceuticals, and all of the revenue that we have recognized in the nine months ended September 30, 2009, was the result of recognizing the upfront payment from the Endo partnership agreement. We did not recognize any revenue in the 2008 periods.

Our operating expenses decreased in the 3-month and 9-month periods ended September 30, 2009, compared to the comparable 2008 periods. Total operating expenses were $13 million and $46.2 million in the 3- and 9-month periods ended September 30, 2009, compared to $21.1 million and $60.8 million in the comparable periods in 2008.

GAAP expense relating to research and development decreased 3- and 9-month periods ended September 30, 2009, to $9.2 million and $32.2 million compared to $16.8 million and $47.2 million in the comparable periods in 2008.

Decreases in research and development expense are related to decreased spending in the 2009 periods on AZ-003, Staccato fentanyl, which we were pursuing in partnership with Endo in 2008. Decreased spending on our AZ-001, AZ-002, AZ-007 product candidates and on device development is consistent with the decision we announced in January 2009 when we had a reduction in force. At the same time, we incurred increased spending during the 9-month period ended September 30, 2009, primarily on clinical development of our lead program, AZ-004.

GAAP G&A expenses also decreased in the 3 and 9-month periods ended September 30, 2009, to $3.8 million and $11.9 million compared to $4.4 million and $13.6 million in the comparable 2008 periods. The period to period decreases resulted from reduced personnel expense resulting from our reduction in force effected in Q1 2009 and general cost cutting measures.

At September 30 2009, cash, cash equivalents, and marketable securities totaled $14.7 million. In early October 2009, we issued an aggregate of 8.107 million shares of common stock and warrants to purchase up to an additional 7.296 million shares of common stock in a private placement. These securities were sold as units with each unit consisting of one share of common stock and a warrant purchase nine-tenths of a share of common stock at a price purchase of $2.4325 per unit. The net proceeds after deducting the payment of the placement agent fee and legal, accounting, and other offering expenses were approximately $19.1 million.

Warrants issued are cash or net exercisable for a period of seven years from October 5, 2009, and have an exercise price of $2.77 per share. We project that the net proceeds of this offering in combination with our cash, cash equivalents, and marketable securities of September 30, 2009, along with the interest cash from option exercise and employee stock purchase plan purchases will support operations ended the second half of 2010.

We expect our cash needs will continue to go down in the coming quarters because we have completed the bulk of the clinical work on our lead program and have no currently planned clinical trials in 2010.

Just a few words about the Symphony transaction: On August 26, 2009, Alexza completed the acquisition of Symphony Allegro pursuant to an amended purchase option including all rights of AZ-004, AZ-104, and AZ-002. In exchange for all of the outstanding equity of Symphony Allegro, Alexza issued to Symphony capital 10 million shares of Alexza common stock and issued 5-year warrants for 5 million shares of Alexza common stock at an exercise price of $2.26 per share, and at the same time we cancelled Symphony capital’s then outstanding warrant for 2 million shares of Alexza common stock.

We also agreed to pay Symphony capital certain percentages of cash payments that may be generated from future partnering transactions for AZ-004, AZ-104, and AZ-002. These possible future payments were accounted for as a capital transaction that did not affect the company’s net loss and were treated as deemed dividend for purposes of reporting net loss per share attributable to Alexza stockholders, increasing loss per share attributable to Alexza stockholders by $61.6 million, and all of this is presented in the financial statements that are included in the 10-Q.

I’ll now turn the call back to Tom for concluding remarks.

Tom King

Alexza continues to make great progress with our lead program, AZ-004, for the acute treatment of agitation. The more we learn about our novel anti-agitation drug, the more impressed we are with its clinical characteristics, both efficacy and safety, but also how we believed AZ-004 is going to change the practice of medicine in treating patients with agitation. We have completed primary market research with physicians, with nurses, with patients and/or caregivers, and it is very clear that these patients need the combination of speed, predictability, and ease of use that is conveyed with the use of AZ-004.

We remain significantly ahead of our original plan for the clinical development and regulatory timelines of this product and have confirmed today our guidance of an early 2010 NDA submission target. The completion of the acquisition of Symphony Allegro allows us to again fully own the complete product rights to AZ-004. Concluding this transaction was a very important step in the commercialization pathway of AZ-004.

Also on the commercialization pathway, we continue to have very productive partnering discussions for territories including the United States and also territories outside the United States.

Our expectation for a commercial partner reflects our view of this large unmet market opportunity, that is, an ideal partner for AZ-004 is company or a partner who approaches the agitation market as one where you desire to build and create this new market. It is not a market where you simply capture market share from existing already approved drugs.

Creating new medical markets is challenging indeed, but we believe that the reward will be profound for both Alexza and the ultimate commercial partner or partners for AZ-400.

We look forward to continuing to update you during the coming months as we move closer to the AZ-400 NDA submission, and hopefully, the ultimate approval and product launch of this important new therapy. Thank you again for your time today and for your ongoing interest and support in Alexza.

We would now like to open up the conference call up for Q&A session.

Question-and-Answer Session

Operator

(Operator Instructions). Your first question comes from the line of Ted Tenthoff with Piper Jaffray.

Ted Tenthoff – Piper Jaffray

Tom, you touched on this a little bit on the call, but what actually still has to be done in preparation of the NDA filing early next year, and as you look at some of the changes that are passing through with respect to Medicare and healthcare bills in general, what is the potential impact, positive or negative, on 004 and partnering discussions?

Tom King

In terms of the NDA filing, we’re in the stage right now where we are in final report writing. There are three major sections to the NDA. There is the clinical section, there is the non-clinical analytical section, all the animal toxicology, pharmacology, in vivo, and in vitro testing, and there is the CMC section. At this point in time through the next couple of months, we’re writing reporting, editing reports, uploading reports. The last report that I had that we have was almost 50,000 pages already uploaded into our contract supplier who is doing the electronic submission, so it’s a fairly weighty document, and once it gets uploaded and we through a pretty thorough QC/QA of the data of the information as it resides on their server before we actually get ready to sent it off to the FDA, so I think data collection is basically done at this point in time, and it is process related in terms of final report writing, final editing, completion of the integrated summary of safety, integrated summary of efficacy, and getting it all uploaded, doing the final QC checks and being off and running for the submission early next year.

In terms of healthcare and the healthcare debate, AZ-004 is going to be at least for its first approval in an interesting spot, I think. Agitation is not an ICD-9 or DRG, and a result of finding it difficult to find information on treating these. The other side of that coin is that it’s an area of medicine that doesn’t have I would say a lot of imposition in terms of cost per se. Patients that come into an emergency department or come into a long-term care facility are on a more capitated system no matter how that system is defined, whether it’s a private payer or a public payer, and as such a drug that can facilitate throughput, a drug that can facilitate maybe not using restraints and not having to write reports about using restraints, a drug that doesn’t have to have someone sit with them as they get an old drug that might not work as fast are all components to a very strong overall health economic argument, and we believe that even though there is a lot of froth obviously in the healthcare debate around the United States currently, AZ-004 to a large degree is outside what that froth or what discussion might be.

Ted Tenthoff – Piper Jaffray

Ultimately, how big do you think your sales force would be needed to retail this effectively?

Tom King

We break it into three groups Ted. We think there’s probably 75 or so in the way that we have looked at it. Our partnering discussions have similar views in some cases and dissimilar views in other cases in terms of the initial indication which is the medically supervised use of this drug in treating agitation in patients with bipolar and schizophrenia. As we think about moving the drug from there with an SNDA into the outpatient market, again treating the same patient population but having them have the chance to treat some of their episodes at home, we think the sales force would probably grow by another 50, so up to about 125. As we look at the ultimate third step in moving this to treat agitation more broadly, so then we move outside of psychiatry and now we start talking about neurology and some of the other CNS diseases that also have agitation, there’s probably another 50 to 75 sales reps that would come in, so ultimately the sales force that would be involved with selling with this probably around couple of hundred.

Operator

Your next question comes from the line of Jason Kantor with RBC Capital Markets.

Jason Kantor – RBC Capital Markets

Could you give us some kind of update on partnering front? Do you all the information now having completed these studies that you think you might need or is there any other piece of the puzzle that might be required in order to get a deal done?

Tom King

From a partnering perspective, we’re running a simultaneous process with more than one party, and so we don’t have any new information that we need for that. At this point in time, it’s just going back and forth with diligence if you will on both sides. The parties are obviously interested in diligence and looking what our FDA communications are, what our clinical data sets are, how we did the statistics, how we plan on scaling manufacturing, cost of goods models, on and on. They’re just doing their traditional diligence, and on our side, we’re extending how to do diligence in terms of what the commercial pathway would be and how they would meet that. In some cases, it’s US only; in some cases, it’s US and international; in some cases, there’s already existing sales forces; in some cases it would be built specially for us and this product, and so we’re deep in that diligence process with multiple parties, but in terms of additional information that’s needed that we might collect, either from a clinical trial or from a manufacturing scale-up or something like that, there is no additional data that we need collect at this point in time.

Jason Kantor – RBC Capital Markets

What role do you hope to play in the marketing of the drug, and can you give us some kind of sense of how you think about the size of the market in terms of patients, price per patient, and number you can treat any given year?

Tom King

Yes. I think our role in the overall commercialization fits in three areas Jason. We would want take a leading role in continuing to expand the indication. We’ve demonstrated a high degree of competency and clinical research and clinical development, moving into the pediatric population, moving into the outpatient population to something that we want to take on and we would envision that a partnership would compemplate that and would have rewards for that.

The second major part that we would take on as part of a commercial organization is manufacturing. You’ve visited and several other folks on the call have visited our facility in Mountain View. We believe that facility can product 6 to 7 million units when it’s at full scale, and we would be key responsible person to not only make finished products here in Mountain View but also manage the 3 or 4 key supplier relationships that supply components to our device and to our technology.

From a marketing perspective, while maybe a couple of years ago we had a stronger aspiration to use AZ-004 as a launch pad for ourselves to get into the market, I think the combination of the difficult financial times and quite frankly the size of this opportunity is more broad than we thought that it makes sense for someone else to take a lion’s share of that. We would still be involved with publications. We’d be involved with strategic marketing. We’d be involved with advocacy groups and some of the things that we’ve gotten started with key opinion leaders, but at this point in time, we don’t anticipate having actual sales reps that would carry the Alexza business card.

Operator

(Operator instructions).

Thomas King

We’re seeing no additional questions today. Thank you again. We look forward to keeping you posted as we march aggressively to the NDA for early next year, and we’ll continue to keep you updated on that and on our partnering as we work toward the commercialization of AZ-004. Thank you again for your tme today.

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Source: Alexza Pharmaceuticals, Inc., Q3 2009 Earnings Call Transcript
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