Good morning, and welcome to Flamel third quarter 2009 earnings conference call. All participants will be in listen-only mode. (Operator Instructions). After today's presentation, there will be an opportunity for you to ask questions. Please note this event is being recorded.
I would now like to turn the conference over to Stephen Willard, Chief Executive Officer of Flamel Technologies. Please go ahead.
Thank you very much, Nicky and good morning ladies and gentlemen. 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 third-quarter results demonstrate our success in executing on our business model, which leverages our growing comparative advantage in drug delivery to develop multiple projects with leading partners while generating the financial strength we have been using to further develop our technologies and strengthen our balance sheet.
During the third quarter, we achieved significant technical and pre-clinical success in moving forward with our existing projects. We signed two further agreements during the quarter: one is a partnership with a leading pharmaceutical company and leverages the Medusa platform for potential application to multiple molecules; and the other is an agreement to use the Trigger Lock platform for a pain medication.
We also increased cash during the quarter to $48.8 million, up from $45.1 million at the end of the second quarter. This marks the fifth consecutive quarter in which we have increased our level of cash and marketable securities in constant currency.
The data from our ongoing projects continues to be quite positive. We learned last month that Pfizer had chosen to exercise the option to license the Medusa platform for an already marketed therapeutic protein that was in the Wyeth portfolio. This protein is being delivered using Flamel's Medusa technology in the intravenous setting.
We believe that this technology is extremely valuable and could be leveraged for further opportunities. These opportunities promise to address large markets as does the 2007 Wyeth, now Pfizer,3 agreement, and we expect that the upfront payments and milestone schedules will improve significantly given the strengths of the Medusa platform that we have now demonstrated.
I believe that we are opening a third chapter in the value proposition that Flamel technology provides. 18 months ago, many investors questioned our ability to maintain and grow our balance sheet. With the cash results obtained over the last five quarters, I hope that investors clearly see that we have a strong sustainable model, which is financially sound and sufficient to fully fund our organic growth.
Based on this track record of financial strength, the next step was to demonstrate the needs of large pharmaceutical companies for our technology, and our ability to bring them into partnership with Flamel over a diversified group of therapeutic agents, delivered in a multitude of ways, best suited to each molecule.
With the new projects which we have consistently announced over the last 18 months, I believe that Flamel is clearly recognized as providing superior drug delivery technology, which is of great interest to many of the largest pharmaceutical companies of the world.
Now, while we will continue to focus on financial strength and new business opportunities, many of our projects are progressing well through their technical development, and we hope that much of our focus going forward will be on our technical success and the opportunity that will give our partners to move these formulations closer to the market.
I'd now like to ask Siân Crouzet, our Principal Financial Officer, to please discuss our financial results for the quarter. Siân?
Thank you, Steve. There are a number of elements that I wish to highlight from the third-quarter results. The first is the growth in the license and research revenue. As many of you are aware, we look at our license and research revenues closely as it is the lead indicator of the company's pipeline and the greatest catalyst that we are developing.
Our license and research revenues grew year-over-year during the third quarter by just over 50%. This growth is primarily a reflection of the work that we are undertaking with Merck Serono as well as with Pfizer, Baxter, and the remaining feasibility studies with various unnamed partners.
As for our remaining revenues, other revenues which are composed primarily of royalties from sales of Coreg CR amounted to $2.5 million compared to $3 million in the third quarter of 2008. Product sales and services consisting of the production of Coreg CR microparticle to GSK is decreased to $2.7 million compared to $3 million in 2008. As you are aware, sale of product is on a cost-plus basis and represent ongoing demand for the product from GSK.
The second element I wish to discuss, are our operating cost. Clearly, as our project pipeline build and projects advance into late-stage development, costs incurred on R&D activities increase. Its increase represents our need for sufficient resources to start with our external program and internal program, and the financing of pre-clinical activities to confirm our laboratory research.
On our external programs, these costs are generally financed by our partners. Our continued investments internal program in parallel with our external programs is key to the development of the next generation of our technologies.
Finally our cash levels, which have increased for the fifth consecutive quarter in the constant currency term. At the end of September, our cash and marketable securities was $48.8 million versus $45.1 million at the end of the second quarter.
Over the last year, our cash and marketable securities have increased almost 50%. The company has been able to achieve this during what is obviously a very difficult financial environment by executing its business model. This model has enabled the company to benefit from upfront payments than stretching our capacity to leverage our technology with multiple parties or multiple opportunities. Our financial results and the strength of our balance sheet make us well positioned to continue to succeed and develop numerous business opportunities.
With that, I'd like to turn the call back to Steve.
Thank you, Siân. As Siân pointed out, our license and research revenues during the third quarter increased more than 50% versus the prior year. This is the money our partners pay us to apply our technology to their molecules. I think it serves as an important indication of the increasing success we are having in attracting partners, and working to provide potentially superior formulations of a number of both existing therapies as well as new chemical entities.
These revenues include a portion of those that we are receiving from Baxter to work on certain drug factors pursuant to the agreement that we signed with Baxter in the second quarter. As many of you will recall, Baxter paid €2.5 million in technology access fee to Flamel, and will pay the full cost of the feasibility study on these drug factors. We began work immediately and are pleased with the progress that has been made thus far. We believe that this is an excellent project to showcase many of the outstanding advantages offered by the Medusa platform.
We've already seen through our work with Wyeth and now continuing with Pfizer that there is strong interest to create control release formulations of intravenous drugs. Reducing the frequency with which patients needs to undergo treatment is an obvious advantage, both with respect to patient convenience, but also with respect to the pharmacoeconomics involved.
It is costly to administer IV formulations. Also doctors in hospitals do not receive high reimbursement for administering the formulations. Furthermore, beyond the advances of fewer injections, we and our partners are investigating whether Medusa can confer certain other benefits for patients as well.
We've already seen some of these benefits with other molecules. For example, in many cases, Medusa affiliated molecules do not suffer from the aggregation that effects the same molecule in their unaffiliated state. Aggregation may be associated with immunogenicity, such that we may be able to address what is an important issue for many molecules. Those molecules that suffered from significant aggregation problems are typically shelved for obvious reasons.
We believe that Medusa may have a role to play in addressing this issue. Another threshold issue that the Medusa platform is able to address is low solubility. Here too, we now have data which demonstrates significant improvements in solubility that the Medusa platform offers to our partners.
Both of these issues, aggregation and low solubility can stop development of the molecule, but as partly for this reason that many of the projects that we are working on with the Medusa platform involve novel molecules. Many of these projects are advancing well, and we are pleased with the data that we have generated thus far. Of course, the work on these molecules is often more complicated than when we are working with already approved biologics. The data takes time to accumulate and there is usually further work that needs to be conducted before going into the clinic. There are also higher attrition rates to be expected given the untested nature of the molecules themselves.
Nevertheless, we are very pleased with the technical results that we have achieved. These results are significant in and of themselves to the extent that the molecules show promise. But they are also significant in attracting new partners. We have included slides in our newest corporate presentation available on our website under the Investor Relations tab that further elaborate on these advantages.
We attracted a new Medusa partner during the quarter for multiple molecules, we also engaged in negotiations for a variety of opportunities to use the Medusa platform with vaccines, which we believe is a potentially very attractive opportunity for the Medusa platform. The companies that we are negotiating with are among the top companies in this space, in keeping with the strategy that we have taken with many of our development agreements, such as the ones with Baxter, Merck Serono, and of course, Pfizer.
With respect to Micropump, we began work on development of a further Trigger-Lock formulation during the quarter, but it's possible that this could be one of the two Micropump opportunities that we believe could be on the market as early as 2011. Medusa projects have a somewhat longer regulatory pipeline, and depending on the aid of our partners, our hopes are that our formulations could begin to get to the market within a couple of years after that.
As you have seen over the past five quarters, we have been able to increase our cash as we worked further to develop our competitive lead versus alternative technologies. Creating additional royalty streams beyond Coreg CR, there is something that we believe could have a dramatic effect on Flamel's financial results, given that the company has no debt and only 24 million shares outstanding.
The successful future development of these opportunities together with the further advancement of the Medusa projects currently in clinical development, and the expected publication of data by our partners that would accompany these advances, all of these lead us to believe that they will further enhance confidence in our company and its technologies.
We had pursued a consistent strategy of seeking to develop multiple diversified revenue streams. We have built a strong business model, which allows us to fund our growth without dilution through our partnerships and other opportunities.
We have attracted many of the largest partners in the industry, and are working on many molecules with sales in excess of $1 billion a year each, plus we are actively involved with many of our partners' most promising new molecules, and we are generating the technical success to help move our formulation through the evaluative and regulatory processes with a view to getting these formulations into the market as quickly as possible.
With that, we would now be pleased to take your questions.
(Operator Instructions). Our first question comes from Peter Butler of Glen Hill Investments. Please go ahead.
Peter Butler - Glen Hill Investments
I think you first mentioned, the commercial target dates for several molecules in a road show presentation in Boston, and I think since that time you might have added one or two on there. Could you expand on what you see now and maybe give us some assessment of the odds on what's going to become commercial in 2010, '11, '12, '13, et cetera?
Sure, Peter. Actually if you look back, you'll see that our first reference to potential date with regard to trying to get products on the market occurred on a conference call. I think it was two and perhaps three quarters ago. So the comments in Boston were following the conference call that was done publicly and no new information was released in the Boston Investor Meeting.
But we have talked about how we believe that if everything breaks our way and with the strong support of our partners, that we could have Micropump products on the market in the 2011 timeframe, and that we could have and there are more than one that could achieve that timeframe. With regard to Medusa, because of the longer regulatory framework, it could take another two or three years potentially but there are a significant number of projects that could fit within that timeframe.
So it's hard to give you percentages. One of the new metrics we're working on is trying to convey sort of project by project what is happening with each of our 21 programs. But putting a percentage on each of the programs is difficult because while we are extremely confident of our technical success based on our track record, even though we're taking on some very significant technical challenges, again, we're confident that we'll have a very high percentage of technical success, but whether the product gets to market and when will be within the control of our partners.
Now some of these products are very significant products for our partners in terms of their current revenues or in terms of their position at their very highest point of their research and development pipeline. So we hope those will move expeditiously, and we continue to try to work with our partners to continually look for legitimate ways to reduce timelines and get these products poised for the market as soon as possible.
Peter Butler - Glen Hill Investments
Are your projects with Baxter and Wyeth, are they your top priority projects now? What could we expect to see in the next couple of quarters, what's the timeline and what events are coming up?
Well, I think, first of all, all of our projects are important. Obviously, blood factor is still in excess of $5 billion or something like that, I think per year. So blood factors are obviously an important group of our projects. With regard to Wyeth, now Pfizer, we have successfully had three go/no-go decisions break in our favor during the time we've had that project with Wyeth. I would expect further go/no-go decisions for the development milestones with regard to both of those projects within the coming year, and potentially multiple go/no-go decisions with economics attached.
Our next question comes from Matt Kaplan of Ladenburg.
Matt Kaplan - Ladenburg
So it looks like now you've got about 16 Medusa projects and 5 Micropump projects ongoing. Could you give us a sense in terms of how many of the Medusa programs are IV versus subcu, it seems like you are getting a lot more traction on the IV side?
Sure. I'm simply trying to make sure I don't violate confidences of some of our partners. I can think of at least four molecules that are IV at this point. You obviously know that the technology was initially developed for subcu delivery. We're very pleased that at least four and perhaps a little bit more are involving intravenous delivery.
Of course, without talking about partnerships necessarily but rather talking about technology, one of our important internal focuses has always been the possibility of taking intravenous drugs, at least drugs that are administered intravenously now, and trying to deliver them subcutaneously. So that remains an important part of our internal development, and would obviously have positive impact in terms of existing or potential partners.
Matt Kaplan - Ladenburg
Then, you gave some detail in terms of the Pfizer Wyeth deal. Could you give us some more detail on that in terms of what was the Pfizer's decision in terms of go/no go decision, what was that predicated on, the recent decision? Then, I guess how can this be applied or can it be applied to the Baxter relationship as well, in terms of progress being made?
I think, yes. Obviously, we have made a real commitment to trying to increase the information flow from our partners. This decision by Pfizer occurred just at the time that the Wyeth acquisition was being consummated. So getting the attention of our colleagues at Pfizer to try to increase the information flow at this juncture was difficult, and so that's why we put out the information but we don't have a quote from Pfizer there. They are up to their eyeballs is in the integration of the two companies.
But I certainly hope that once things settle down there a bit, we will be able to persuade them to allow us to speak more. I mean, clearly, the success with any given project often leads to advances with other projects, and I think certainly the fact that after two years we've had success with the intravenous application of the Pfizer project, we'll clearly have application to other projects like Baxter and others.
Matt Kaplan - Ladenburg
You've spoken a little bit about the Micropump projects perhaps hitting the market in 2011. Previously, you've talked about an OTC product. Where does that stand in development right now, and is that one of the...?
That would be one of the ones that could potentially be on the market as early as 2011.
Matt Kaplan - Ladenburg
Then, just a overall question in terms of the vision for the company, what's your thoughts on continuing to be able to grow your cash balance in future quarters?
I think the trend is clearly positive. I'm not going to sweat it if we have one quarter that doesn't, five in a row does not necessarily mean that we have to do it every quarter for the rest of our lives. What is important is the trend. I mean, as I said 18 months ago, people thought we might be suffering a similar fate to other companies in our space. Many of which had to fold up or otherwise have faced great difficulty. I think we are very strong, I think we have clearly shown that we can robustly fund our own internal development as well as strengthening our cash position.
I think that the trends of the past are likely to continue although I would encourage people not to worry about how many consecutive quarters we can lock-up just along as the trends continues to be positive. I mean, as we pointed out, we have 21 projects.
As these projects continue through the process, we would expect the money from those projects or at least some of them to increase, which will contribute cash, we will continue to actively seek additional partnerships and licensing agreements that will contribute cash. We have shown creativity in leveraging other cash such as French government cash that is available with no strings attached, and so I think we will continue to be financially strong as we go forward.
Matt Kaplan - Ladenburg
Then just one final question and I'll jump back in the queue. In terms of the progress in the pipeline and of the projects that we know, could you give us an update on the Merck Serono and when we should expect some milestones there? Then some of your internal programs as well, you mentioned the French government funding, what's the status of the (inaudible) program?
I would expect within the next few weeks to put out a press release and hold a conference call with regard to dosing of the first patient in connection with that study, so I'd like to leave any real comments about that for when we are able to dose our first patients, but everything seems to be going quite well with that.
In the event that we do that conference call, we will try to give clearly detailed information about details of the study, number of patients, the number of arms, clinical endpoints that sort of thing. But I'd like to leave that for a few weeks, what we probably expect to be a few weeks time.
With regard to Merck Serono, it is progressing, particularly the largest project with them, it is going very well. I think you will see additional developments and payments certainly in the first half of next year.
We have a follow-up question from Peter Butler of Glen Hill Investments.
Peter Butler - Glen Hill Investments
I think I have asked before or mentioned before the need to maybe aggregate where we are in with all these projects, and to maybe have it all displayed on one page or two pages on the chart. Many, many companies do that in situations where they have pipelines and multiple projects. I think it could be very useful to allow investors to keep track of where we are on things and...
You have mentioned that, Peter. We think it's an excellent suggestion, and we have a slide in development right now with regard to trying to provide that information. We have a couple more issues to resolve with partners about what can and cannot be disclosed. But I agree with you that that's a helpful additional metric or slide or a way of expanding the company to investors and it is in the works.
Peter Butler - Glen Hill Investments
I guess on a less happy note, the stock prices are function of the fundamental story and how the story is communicated with investors. What we heard so far on the conference call is that the story is good, but the stock sure doesn't look like it.
I mean, the previous policies of the board and maybe OSS are not working, and the stock is sitting there, and we think the fundamentals are worth multiples of the stock price and yet the stock languishes. When you keep doing the same thing and it's not working but you're hoping for a better outcome, that doesn't say good things. I'm wondering whether the board and [Oscar Schafer] are maybe willing to look at new policies.
I mean, I think, clearly, none of us or at least the large chunk of us are not pleased with the way the stock has acted over the past week to 10 days. I would note that the stock is up 85% year-to-date, so that despite the disappointments of the last couple of weeks, for those who maintain a somewhat longer view, this is a stock that in the aggregate has been moving forward.
I think we continue to work on what is the best way of communicating our story because I think the technologies we have are extremely exciting, we had a tremendous amount of success. They are novel; they deliver novel results that cannot be achieved with other technologies.
Major pharmaceutical companies are actively embracing them. We have 21 projects that are moving forward at one stage or another. You are right, I think the fundamentals of this are very strong, particularly from week-to-week; we can have very disappointing weeks in terms of our stock price.
I think there is, certainly, the first cure is to continue to deliver success with regard to our science and our partners, to continue our strong cash performance, but also we need to investigate investor relations methods of conveying our story better. I would be the first one to say that that stock price is a very good way of evaluating my success or failure to-date with conveying the story, and I will work to improve it.
Thank you. This concludes our question-and-answer session. I'd like to turn the conference back over to Mr. Willard for any closing remarks.
Yes. Thank you very much, Nicky. I am very pleased with the way we've been developing over the past year to 18 months the financial success, the success in our business development, and as I said increasingly the technical and clinical success that we are beginning to show as our projects move through the regulatory and evaluative processes.
I think this is a time of great strength for Flamel and it's been getting stronger quarter-by-quarter. We hope that you will continue to give your attention to Flamel, and we look forward to speaking with you in the near future. Thank you very much for your interest in Flamel Technologies.
The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.
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