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Executives

Timothy Enns – SVP, Corporate Communications and Business Development

James Manuso – Chairman, President and CEO

Michael Molkentin – CFO and Corporate Secretary

Mohammed Azab – Chief Medical Officer

Analysts

Robin Davison – Edison Investment Research

SuperGen Inc. (SUPG) Q4 2009 Earnings Call Transcript March 2, 2010 4:30 PM ET

Operator

Good day, ladies and gentlemen, and welcome to the fourth quarter 2009 SuperGen earnings conference call. My name is Jennifer and I will be your operator for today. At this time, all participants are in listen-only mode. Later, we will conduct a question-and-answer session. (Operator Instructions) As a reminder, this conference is being recorded for replay purposes. I would now like it turn the conference over to your host for today, Timothy Enns, Senior Vice President of Corporate Communications and Business Development. Please proceed.

Timothy Enns

Thank you, operator. Good afternoon and thank you for joining us today for SuperGen's 2009 fourth quarter and annual financial results. With me today are Dr. James Manuso, President and Chief Executive Officer, Michael Molkentin, Chief Financial Officer, Dr. Mohammed Azab, Chief Medical Officer and Michael McCuller, Senior Vice President, Strategy and Discovery Operations.

In a few moments, Jim Manuso and Michael Molkentin will deliver remarks on the 2009 fourth quarter and annual financial results and provide a summary of our business outlook. After our prepared comments, we will open the line for questions. Earlier today, we issued a press release that addresses our 2009 financial results.

A copy of the press release is available in the investor relations section of our website at www.supergen.com. In addition, this call is being webcast and may be accessed via the investor relations section of our website. A webcast replay will be available for 30 days.

During the call, we will make projections and forward-looking statements that are based on management's current expectations. Actual results may differ materially from these forecasted projections due to various factors. There are significant risks and uncertainties in biotechnology research and development. There can be no guarantee that our projects, products, or product candidates will progress preclinically or clinically as we expect or that we will ultimately obtain approvals from the indications that we seek.

Moreover, even if our products or product candidates are improved in the future, we cannot guarantee that they will be commercially successful. The company's results may also be affected by a variety of factors such as competitive developments, launches of new products, the timing of anticipated regulatory approvals or other regulatory action, the action of our strategic partners and collaborators with respect to the products we license or codevelop and patent disputes and litigation.

For additional information and discussions concerning the risk factors that affect the company's business, please refer to the company's filings with the Securities & Exchange Commission including reports on our most recently filed form 10-K and form 10-Q. The company undertakes no duty to update forward-looking statements.

I will now turn the call over to Dr. James Manuso, who will provide highlights of our accomplishments during the 2009 fourth quarter and fiscal year. Jim.

James Manuso

Thanks very much, Tim. Good afternoon and thank you for joining us today for SuperGen's 2009 fourth quarter and year-end conference call. In short, 2009 was an exceptional year for our company. The company is reporting a profit for 2009.

Cash reserves have improved, clinical, preclinical and discovery programs were advanced and a very significant discovery and development collaboration with GlaxoSmithKline or GSK was initiated. SuperGen achieved net income of $4.7 million in 2009. As of December 31, we held nearly $101 million in unrestricted cash, cash equivalents and current and non-current marketable securities.

This strong financial position will enable SuperGen to execute 2010's current and planned discovery and development initiatives. Dacogen continues to be the primary source of revenue for SuperGen and Eisai or Dacogen licensee and Johnson and Johnson, the sublicensee continue to commit their resources to the ongoing development, sales and marketing of the drug.

In 2009, Dacogen generated royalty revenue of $41.2 million, an increase of $2.8 million or approximately 7% from the prior year. Current sales and market share of Dacogen in North America continue to be significant. January IMS reports released this morning show that Dacogen is maintaining a 40% market share in a hypomethylator market that is increasing.

In addition to Dacogen's ongoing revenue contribution, 2010 will be a telling year for this important drug. First, the phase III elderly AML trial data are expected to be released within the first half of this year. This 485-patient randomized controlled clinical trial in AML patients’ aged 65 years and older is the subject of a food and drug administration or FDA special protocol assessment or SPA that incorporates an agreed upon primary end point of overall survival.

The implications of this trial are tremendous for patients worldwide since there is currently no approved treatment for the indication of elderly AML. Eisai and Johnson and Johnson have guided to FDA and EMEA submissions for Dacogen respectively this year.

Another important Dacogen milestone is expected to occur this quarter. March the 8, is the prescription drug user fee act or PDUFA date when FDA will issue a complete response letter for Eisai's application for a new alternative outpatient five-day schedule of Dacogen.

Finally, Eisai has commenced a large head-to-head trial comparing Vidaza to Dacogen in MDS patients. On the clinical front, we are completing data analysis on multiple phase I trials with amuvatinib, formerly designated MP-470, our oral multi-targeted tyrosine kinase inhibitor and DNA repair expresser. The outcome of this analysis will help determine whether we partner the program at this point in its development or advance the program in a small randomized Phase II trial to confirm the proof-of-concept via definitive clinical activity.

In November of last year, at the AACR-NCI-EORTC conference we presented two posters concerning amuvatinib. The first reviewed data demonstrating that amuvatinib does inhibit RAD51 DNA repair while at the same time increasing tumor cell sensitivity to radiation and chemotherapy.

The second poster summarized data indicating that the improved lipid formulation of amuvatinib significantly increases oral bioavailability of the drug. This new formulation will be used in any phase II studies that are undertaken. With respect to SGI-1776, our first in class Pim kinase inhibitor late last year, our researchers presented posters at both the AACR-EORTC-NCI and American Society of Hematology or ASH meetings confirming positive preclinical data.

We also initiated a first in human phase I clinical trial of SGI-1776 in refractory prostate cancer and lymphomas. We expect to initiate a phase I/II trial of SGI-1776 in refractory leukemias during the first half of this year. Mid-year SuperGen will file with the FDA an investigational new drug application or IND for SGI-110, a next generation of decitabine-based product.

SGI-110 is a low volume, high concentration subcutaneously administered drug. Preclinically, SGI-110 has been shown to have an acceptable safety profile with many of the positive therapeutic hallmarks of Dacogen. It is hoped that patients might benefit from SGI-110's potential for being administered on a more continuous basis than existing hypomethylators and that it might impact solid tumor manifestations of hypermethylation, a phase I first in human trial of SGI-110 will be initiated during the second half of 2010.

SuperGen's discovery group is currently working on several drugs to inhibit a variety of novel targets. I would like to highlight two programs. The most advanced program is intended to inhibit Axl kinase. This tyrosine kinase is important because it is implicated in the metastatic processes of many cancers.

A lead candidate is expected to be selected before the end of this year. Another important discovery stage program was revealed publicly in the fourth quarter of 2009 with the announcement of an epigenetic focused collaboration with GSK. Epigenetics refers to the regulation of genes with mechanisms other than changes to the underlying DNA sequence.

Epigenetic processes appear to play central roles in the development and progression of all cancers. SuperGen's depth of expertise and epigenetic processes and therapeutics grew out of our preclinical, clinical and regulatory development of Dacogen. The discovery and development of SGI-110 and our continuing interest in the mechanism of tumor suppressor gene silencing and reactivation through epigenetic processes.

The GSK discovery and development collaboration is intended to generate two drugs and their respective backups. If both potential products are approved and commercialized, this collaboration could generate in excess of $375 million in total development and commercial milestones as well as tiered royalties starting in the high single-digits and increasing to double digit magnitude.

Approximately, $80 million of milestones could be earned up to and including option exercises by GSK while the program remains under SuperGen's direction and control. This collaboration having commenced late last year is progressing according to plan.

In summary, 2009 was a foundational year for SuperGen. It was a profitable year, putting the company in a stronger financial position. A landmark collaboration with GSK was initiated and a growing pipeline of novel products at the discovery preclinical and clinical stages neared achievement of proof-of-concept thereby preparing them for potential partnering.

Just a few years ago, SuperGen was a specialty pharmaceutical company, subject to the vagaries of a limited number of affordable products that might be available for acquisition. The company has come a long way since that time.

Now, more than ever before, we are the masters of our destiny. We have solid financials, a revenue generating marketed product with growing worldwide sales potential, a wholly owned novel and diversified pipeline and a promising discovery collaboration with a major pharmaceutical company.

We look forward to 2010 and beyond optimistically from a position of strength. To remind you, our strategic intent is to take through to proof-of-concept our drugs, preferably first in class drugs and to partner them at that time. Our goal is to monetize assets early in the development cycle, to limit our financial exposure by sharing risks with appropriate partners.

We own and control all of our drugs and it is our plan to continue to do so. Naturally, we are always on the lookout for appropriate acquisitions that complement our portfolio and that could yield significant financial upside. In the coming months, we will be presenting at several investor conferences, including the Roth 22nd Annual Growth Stock Conference on March the 15th and the Biocentury Thomson Reuters, future leaders in the Biotech industry conference on April the 8.

Live and archived webcasts of these presentations will be posted in the investor relations section of our corporate website at www.supergen.com. At this time, I will turn the call over to Michael Molkentin, our Chief Financial Officer. Michael will provide details on our 2009 financial results as well as our initial fiscal guidance for 2010. Michael, take it from here.

Michael Molkentin

Thank you, Jim. SuperGen reported positive financial results for the 2009 financial period. Net income for the 2009 fourth quarter was $2.3 million or $0.04 per share compared with the net loss of 2.6 million or $0.04 per share for the same prior year period. The company also reported net income for the year ended December 31, 2009 of $4.7 million or $0.08 per share compared with the net loss of $9.1 million or $0.16 per share for the same prior year period.

I would now like to make a few comments on our 2009 fourth quarter financial results. Total revenues for the 2009 fourth quarter were $12 million compared with $11.9 million in the prior year quarter. Total revenues for the 2009 fourth quarter includes royalty revenue of $11.9 million or similar amount when compared to the same prior year period.

Royalty revenue is earned pursuant to a worldwide license agreement for Dacogen and is generally recognized when received. Total revenues for the 2009 fourth quarter also includes $97,000 of development and license revenue for the recognition of deferred revenue relating to payments received pursuant to license agreement with GSK executed during October 2009. There was no development license revenue in the prior year quarter.

Excluding gain on sale of products, total operating expenses for the 2009 fourth quarter were $10.7 million compared with $15.6 million for the same prior year quarter. The primary reasons for the decrease in total operating expenses for the 2009 fourth quarter were a decrease in acquired and process research and development expenses offset in part by modest increases in research and development expenses related to various product development activities and modest increases in general corporate expenses.

During the 2008 fourth quarter, acquired in process research and development expenses related to a $5.2 million charge resulting from a milestone payment due to the former stockholders of Montigen Pharmaceuticals. There was no similar acquired in process research and development expense for the 2009 fourth quarter.

Included in total operating expenses is non-cash stock-based compensation expense for the 2009 fourth quarter of $693,000 compared with $758,000 for the same prior year quarter. The gain on sale of products for the 2009 fourth quarter was $75,000 compared with $676,000 for the same prior year quarter.

The gain on sale of products for the 2009 fourth quarter related to a reduction in the estimated remaining price protection liability resulting from the sale during 2006 and 2007 of a commercial franchise. The gain on sale of products for the 2008 fourth quarter reflects the receipt of additional cash payments including a reduction in the estimated remaining price protection liability resulting from the sale of our commercial franchise.

The company reported net income for the 2009 fourth quarter of $2.3 million or $0.04 per share compared with the net loss of $2.6 million or $0.04 per share for the same prior year quarter. The net income for the 2009 fourth quarter includes an income tax benefit of $898,000 compared with $6,000 for the same prior year quarter.

The income tax benefit in the current year period was primarily due to the worker homeownership and business assistance act of 2009 that was signed into law during November 2009 by the President that allows for certain net operating losses to be used to eliminate or refund alternative minimum taxes.

In addition, other income tax benefits realized during 2009 and 2008 result from the monetization of research credits and/or other state tax benefits. We continue to report a strong financial position through year end. As of December 31, 2009, we had approximately $100.8 million in unrestricted cash, cash equivalent and current and non-current marketable securities compared with 88.3 million at December 31, 2008.

Now, I would like to provide comments on our initial annual financial guidance for 2010. We anticipate that royalty revenue may increase up to 10% from the prior year to a range from $41 million to $45 million. An additional milestone payment to be classified as a gain on sale of products in the amount of is related to the prior sale of Nipent to Hospira and is forecasted to be received during 2010.

We are also guiding to the recognition of development and license revenue during 2010 of approximately $500,000 that represents the recognition of deferred revenue resulting from initial payments received pursuant to the research and license agreement executed with GSK during our 2009 fourth quarter. Research and development expenses are expected to increase from the prior year level of approximately $30 million to a range from $34 million to $37 million during 2010.

The growth in expenses will be influenced by the timing of increasing costs related to our clinical trial programs primarily for amuvatunib, SGI-1776 and SGI-110. Ongoing product development efforts that will advance our overall product pipeline and additional investment, primarily in certain research and development areas that will further enhance our overall drug research and development capabilities.

General and administrative expenses are expected to increase modestly from approximately $9 million during 2009 to approximately $9.5 million during 2010. Considering all the revenue and operating expense elements in our financial guidance for 2010, net loss is currently anticipated to be less than $1 million for the year.

Included in total operating expenses for 2010 is non-cash stock-based compensation expense estimated at $3 million. Excluding the non-cash stock-based compensation expense from the anticipated net loss for 2010, we would estimate our operations could be slightly cash flow positive, consistent with our goal of being at or near cash flow neutral before any incremental economic benefits resulting from existing or new partnerships.

And lastly, our annual shares outstanding are expected to be approximately 61 million common shares during 2010. This concludes the review of our financial results for the 2009 fourth quarter and the comments on our initial annual financial guidance for 2010. I will now turn the call back to Dr. Manuso for closing comments.

James Manuso

Thanks very much, Michael. We anticipate an encouraging flow of news from SuperGen this year. We expect FDA to take action this quarter on the Eisai sNDA filing for a five-day dosing regimen of Dacogen. Data from the global elderly AML trial should be revealed in the next few months with the prospect of FDA and EMEA filings to follow before year end.

Data from the ongoing development of amuvatunib, SGI-1776 and SGI-110 will be updated throughout the year. We look forward eagerly to 2010 and beyond. SuperGen employees are committed to making a difference in the treatment of cancer. The team remains ever excited about the opportunity to discover and develop new drug therapies to treat cancer.

We have a solid foundation, adequate funding, a growing product pipeline and superb partners in Eisai, J&J and GSK. As always, I want to thank all of our shareholders for their support. I also want to thank our employees with their remarkable capabilities and focus without which, we could not succeed.

With that, Dr. Mohammed Azad, Michael Molkentin, Dr. Michael McCullar, Tim Enns and I are now ready to answer your questions. Operator, we'll take questions at this time, please.

Question-and-Answer Session

Operator

(Operator Instructions) And we'll wait for a moment while the questions compile.

Timothy Enns

Thank you, operator.

Operator

Your first question comes from the line of Robin Davison from Edison Investment Research. Please proceed.

Robin Davison – Edison Investment Research

Thank you. Hi, Jim, gentlemen.

James Manuso

Hello, Robin.

Robin Davison – Edison Investment Research

If first of all, you can give me a little bit of description really, on what the revenue guidance, what might cause you to get to come in at the higher rate? Is this based on the guidance you're getting from your partners or is there any specific events such as the trial outcomes that might lead you to get the high figure of $45 million?

James Manuso

Okay. Well, appreciate first we have suggested that approximately a 10% – up to a 10% increase from 2009, so that gives us a royalty revenue range of $41 million to $45 million. Our assumption at this point is that that is driven primarily by or indeed, almost exclusively aside from the items that Michael Molkentin mentioned coming from the Hospira transaction. That comes all from the sales of Dacogen worldwide and so our assumption is based in large part on our interactions with Eisai and J&J relative to their projections and we also tend to be conservative in giving a range rather than an absolute amount.

As was also indicated, the development and license revenue is expected in the range of half of a million and the gain on sale of products which rebalance back to the Hospira transaction a little less than three-quarters of a million. Perhaps Michael Molkentin has some additional comments in this regard. Michael?

Michael Molkentin

Yes, just a few. You have hit upon the large elements. We do base our guidance initially on the information that our partners provide u, and based on that revenue, we make certain assumptions because we recognize revenue on a cash basis when it is received versus on an accrual basis.

So we do show and are anticipating some growth. And as Jim indicated, we're anticipating some growth on the royalty revenue side of up to 10% for 2010. The other two elements that Jim alluded to, one is the amortization of – or the recognition of deferred revenue on upfront payments that we received from GSK. We received $2 million in upfront payments plus $3 million in proceeds from the purchase of equity, and based on accounting guidance, we computed approximately $2.5 million of that total payment will be deferred and recognized over the initial term of the research agreement which is five years, and that's how we came up with the $500,000 for 2010.

Then the last item that I believe Jim alluded to is we have some nominal residual ongoing payments related to the sale of commercial franchise that we had – that was executed back in 2006 and 2007 where we sold Nipent to Hospira, our Nipent franchise and we have three remaining annual remaining payments of $700,000 based on the European side of the transaction. The first 700,000 we're forecasting this year, and then we have two additional $700,000 payments which are anticipated to be received in the next two year periods.

James Manuso

And if I may adjust one comment, just to put this in perspective, we have made no assumptions whatsoever regarding the potential impact of AML trial outcomes on royalty revenues. We're neutral with respect to the potential impact of that at this time. Obviously, as soon as we know more relative to the outcome, we will revisit guidance and address it at that time, Robin.

Robin Davison – Edison Investment Research

Okay, that's what I was trying to get to, yes. Can I ask a follow-up?

James Manuso

Please.

Robin Davison – Edison Investment Research

Related to amuvatinib, which I shall have to get used to calling, can you give visibility on the timing of the Phase Ib data on that compound?

James Manuso

Yes, we can and I will turn that over to Dr. Azab.

Mohammed Azab

Well, the Phase Ib, we just completed the enrollment, so once we get all the data in and the patients complete the treatment, of course, we'll start the analysis. And I would expect the data to be rolled out and starting submitting to conferences in the second half of this year.

Robin Davison – Edison Investment Research

All right. Okay. And finally as well, on the planned Phase I/II in – the first SGI-1776, have you got a sort of an idea of the design of the study for that refractory leukemia or the size of the number of patients?

Mohammed Azab

And we have not disclosed the details of the trial, but we'll be open to refractory, both acute myeloid and acute lymphoblastic leukemia in addition also to chronic myeloid and chronic lymphatic leukemia, so we'll be oldcomers in terms of hematologic malignancies for the Phase I portion of the trial.

Once we complete the Phase 1 portion of the trial and we believe we're pretty close to MTD dose for the drug based on our experience with the solid tumor trial, which is currently ongoing. We would be able to open a Phase II portion of the trial. That Phase II portion would include a specified number of patients in each type of leukemia that we believe there is a good potential for response and would be analyzed separately as a Phase II portion in refractory leukemia with the MTD, up1776.

Robin Davison – Edison Investment Research

All right. Thank you very much.

James Manuso

Thank you, Robin. Operator, are there other questions?

Operator

There are to questions at this time and I would like to turn the call over to Dr. James Manuso for closing remarks.

James Manuso

Well, thank you very much. Certainly, we're always happy to address your questions as the year progresses. And indeed, to the extent that there are further questions in the course of this coming week, please don't hesitate to contact us. And thank you very much for your time and consideration.

Operator

Ladies and gentlemen, that concludes today's conference. Thank you for your participation. You may now disconnect. Have a great day.

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