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Executives

Gina Nugent – VP, Investor and Corporate Communications

Mark Corrigan – President & CEO

Justin Renz – SVP & CFO

CombinatoRx, Inc. (CRXX) Q4 2009 Earnings Call Transcript March 25, 2010 8:30 AM ET

Operator

Thank you for holding. At this time, all participants are in a listen-only mode. There will be a question-and-answer session to follow. Please be advised that this call is being taped at the company’s request.

At this time, I would like to introduce your host for today’s call, Gina Nugent, Investor and Corporate Communications at CombinatoRx. Please go ahead.

Gina Nugent

Thank you. Good morning, everyone and welcome to the CombinatoRx year-end 2009 conference call in which we will provide a corporate update including fourth quarter and year-end 2009 financial results.

I am Gina Nugent, Investor Relations and Corporate Communications at CombinatoRx, and with me today is Mark Corrigan, President and CEO and Justin Renz, Senior Vice President and CFO.

Dr. Corrigan will provide a business update, overview of recent accomplishments, and key 2010 pipeline and business goals. Then Justin will briefly review fourth quarter and year-end 2009 financial results. After that, they will be available to answer questions during the Q&A session.

But before we begin, let me remind everyone that our statements today about our product candidates and development plans, Exalgo, our collaborations, our financial projections, business development strategies, and business prospects and plans are forward-looking statements under the securities laws. These statements are made based on our current assumptions, expectations, or beliefs, and are subject to a number of risks and uncertainties that could cause the combined company’s actual results to differ materially from these statements.

Our assumptions, expectations, or beliefs may change and the company undertakes no obligation to update or revise any such forward-looking statements to reflect subsequent events or circumstances. In addition, the risks underlying these statements are described or will be described in the Risk Factors sections of the reports we have filed or plan to file with the Securities and Exchange Commission.

I will now turn the call over to Dr. Corrigan.

Mark Corrigan

Thank you, Gina. For many of you, this may be our first introduction, albeit by phone. So let me take the opportunity to introduce myself to those of you who don't know me and tell you a little bit about why I decided to join CombinatoRx.

I've been in biopharma research and development for most of my professional career. Before taking the CEO role at CombinatoRx just a few months ago, I was the Executive Vice President of Research & Development at Sepracor for the last six and one-half years where we took the company into profitability on the back of successful development of central nervous system and respiratory franchises.

Prior to that, I was at Pharmacia & Upjohn for 10 years, serving as Group Vice President of Global Clinical Research and Experimental Medicine. I'm formally trained as a psychiatrist; I'm a distinguished fellow in the American Psychiatric Association and spent five years in academia at the University of North Carolina focusing on psychoneuroendocrinology. I'm also on the Board of Cubist Pharmaceuticals.

I joined CombinatoRx because I see the potential to build a really great biopharmaceutical company, delivering breakthrough products to patients and physicians. As a former Neuromed Board member, I'm very familiar with the merged pipeline opportunities and platform assets that reside within the new CombinatoRx.

We have a number of wholly owned assets that, if managed correctly, could be significant contributors to our future success, including a number of potential product opportunities, true state-of-the-art cell-based drug discovery technologies and proven drug development and regulatory expertise.

By this point, I hope you've had a chance to look at our fourth quarter and year-end 2009 press release that we issued this morning. As you can see, the last 12 months have certainly been busy and quite successful for CombinatoRx. For instance, we successfully merged and integrated with Neuromed, managed the FDA approval of Exalgo, which triggered a $40 million milestone payment, entered into a significant research alliance with Novartis, reported positive Phase II clinical data on Synavive in knee osteoarthritis, and improved the financial terms in our Fovea product development collaboration with Sanofi-Aventis.

Exalgo was approved by the FDA just a few weeks ago on March 1st for the management of moderate and severe pain in opioid tolerant patients requiring continuous, around-the-clock opioid analgesia for an extended period of time.

In addition to providing much needed relief to those who suffer from chronic pain, the approval of Exalgo is significant for CombinatoRx for two very important reasons. First, from a financial perspective, in addition to the $40 million milestone payment we have just received, CombinatoRx is also eligible to receive tiered royalties on net sales by Covidien, our marketing partner for Exalgo. Second is a clear demonstration of our considerable product development expertise. These capabilities reside within our team here at CombinatoRx and will be applied to the many promising drug candidates in our product pipeline going forward.

I'll leave it to Covidien, as our marketing partner, to address the potential market size and launch plans for Exalgo, but suffice it to say, the market for long-acting pain products is large and growing and Covidien expects to launch the product in the United States in the very near term.

We entered into an alliance with the Novartis Institutes for Biomedical Research in May 2009. This alliance is focused on the discovery of anti-cancer combinations using the CombinatoRx proprietary combination high throughput screening, the cHTS platform, and Chalice analyzer software. This is a non-exclusive collaboration in which we are exploring the combination effects in cell lines representing a broad spectrum of cancers with a goal of providing a robust and systematic understanding of combination therapy opportunities.

Under the terms of this alliance, CombinatoRx received an upfront payment, research funding support for two years, and is eligible to receive clinical, regulatory, and commercial milestones. In addition, CombinatoRx retains the right to conduct oncology research on its own behalf, as well as partner with others in the field of oncology, and retains certain intellectual property which may arise from the collaboration.

Turning now to our internal pipeline. In 2009, we presented Phase II clinical data on Synavive in knee osteoarthritis at two of the big and most respected rheumatology meetings, the American College of Rheumatology meeting in October and the Annual European Congress of Rheumatology meeting in June.

These data demonstrated that efficacy with Synavive was observed early in treatment and sustained in all WOMAC measurement subscales including pain, stiffness, and physical function. In addition, these efficacy levels were maintained throughout the 12-month knee OA extension trial, and most importantly, no treatment-related increases in glucocorticoid associated adverse events were observed in the Synavive-treated subjects.

Prednisporin, FOV1101, a CombinatoRx-derived combination drug candidate, resulting from our collaboration with Fovea Pharmaceuticals, was recognized by Sanofi-Aventis as a key portfolio asset when they acquired Fovea in October, based on positive clinical results with Prednisporin in subjects with persistent allergic conjunctivitis. CombinatoRx will be eligible to receive development and regulatory-based milestone payments for Prednisporin of up to approximately $40 million and increased tiered royalty payments of up to 12% of net sales.

And finally, with the successful merger and integration of CombinatoRx and Neuromed on December 21st, we have brought together two state-of-the-art cell-based drug discovery technologies, our Selective Ion channel modulation platform and the cHTS drug discovery technology here in Cambridge, as well as our proven drug development expertise, which we will apply to product assets in our portfolio going forward. These accomplishments over the past year position CombinatoRx to thrive through the long term.

With that review of our major accomplishments complete, I'd like to turn attention to our pipeline and the business goals for the remainder of 2010. First off, I've only been here on the job for a little over two months. So while we've made significant progress in determining our key therapeutic areas of focus and the programs we are progressing, I hope you'll bear with us as we continue to put the finishing touches on specific development plans and related resource commitments. Therefore, for the time, my commentary on these goals will be at a high level.

After a thorough review of our pipeline assets, development expertise, unmet medical needs, and available resources, we have made the strategic decision to focus our R&D efforts in the core therapeutic areas of pain and inflammation. As a result of this driving mission to become a great pain and inflammation company, we have prioritized our product pipeline to focus our time and resources on advancing those internal programs that best fit that profile including Synavive for the treatment of immuno-inflammatory diseases and our N-Type and T-Type calcium channel blockers which have the potential to be a new class of therapeutics for the treatment of chronic pain.

During the remainder of 2010, our product development goals include; first, conducting the earlier-stage work necessary to advance the development of Synavive for the treatment of osteoarthritis. I have reviewed the data on this program and in my opinion, Synavive could be an excellent medicine, but it needs closer evaluation over the next few months.

Secondly, we plan to advance an N-Type lead program from our Ion channel modulation platform into development. We are world leaders in the field of Ion channel modulation with a strong patent portfolio and an experienced Ion channel research team focused on calcium and sodium channel pain blockers.

Thirdly, we will continue to apply our state-of-the-art drug discovery technologies to discover new pain and inflammation product candidates from our internal portfolio, utilizing our Selective Ion channel modulation platform and the cHTS drug discovery technology.

I realize you are probably anxious to hear more about our development plans going forward and we will be in a better position to further articulate our actions in this regard as our evaluation continues.

On the business side, our goals for 2010 include continuing to seek an additional revenue-generating research and technology collaboration for our drug discovery platform such as the Novartis alliance, and maintaining financial strength with sufficient resources to fund operations into 2014. Justin will speak more about this in his remarks now.

I will now turn the call over to Justin to briefly review the financial results for the fourth quarter and the year ending 2009. Justin?

Justin Renz

Thank you, Mark. We reported revenue of $8.6 million in the fourth quarter of 2009 compared to $3.5 million in the fourth quarter of 2008. For the year ended December 31st, 2009, revenue was $17.3 million compared to $12.3 million for 2008. This revenue increase is due to the accelerated recognition of deferred revenue related to the early termination of our agreement with Angiotech.

We had net income from continuing operations for the quarter ended December 31st, 2009 of $25.2 million or $0.57 per share as compared to a net loss from continuing operations of $14.1 million or $0.41 per share in the fourth quarter of 2008. The increase is primarily due to accounting for the Neuromed acquisition including approximately $21.9 million in acquisition accounting gains, as well as a reduction in net operating expenses of $12.4 million quarter-over-quarter including a $3.7 million gain on our legal settlement with Aptuit in the fourth quarter of 2009.

Stock-based compensation expense was essentially unchanged to approximately $800,000 in the fourth quarter of 2009 from $900,000 in the fourth quarter of 2008. For the year ended December 31st, 2009, net income from continuing operations was $1.3 million or $0.03 per share compared to a net loss of $60.6 million or $1.74 per share net loss in the year ended December 31st, 2008. Stock-based compensation expense was approximately $3.9 million and $5.7 million in the years ended December 31st, 2009 and 2008, respectively.

Besides the aforementioned fourth quarter accounting gains, our 2009 results also improved by our $15.6 million gain on the divestiture of Singapore operations, which was completed in the second quarter of 2009.

Although we do not provide 2010 year-end cash guidance, we ended 2009 with cash, cash equivalents, restricted cash, and short-term investments of $25.9 million compared to $43.7 million in December of 2008. In addition, we received a $40 million milestone payment from Covidien earlier this month. As a result, we believe that based on our current operating assumptions, we have positioned ourselves with sufficient resources to fund our planned operations into 2014.

Similarly, we do not plan to provide detailed 2010 cash burn guidance, but based on our development plans as we know them today, our cash burn in 2010 should be less than that of 2009, which was less than 2008.

We are being extremely prudent with our significant, but not unlimited resources and as Mark discussed, we are focusing our efforts on those with the highest likelihood of success. By staying true to that focus, we remain vigilant in our pursuit of opportunities to reduce overhead and as a result, we have consolidated facilities and reduced our overall square footage by more than two-thirds.

In August of 2009, we amended our Cambridge, Massachusetts lease to reduce our footprint, resulting in reduced lease obligations of over $11.4 million and just recently, we began to initiate closure of the former Neuromed headquarters in Conshohocken, Pennsylvania. We will continue to seek opportunities to reduce spend throughout our operations going forward.

And with that, we will stop here and take your questions. Operator, we are ready to take questions.

Question-and-Answer Session

Operator

Thank you. (Operator Instructions) And please standby for your first question. (Operator Instructions)

Gina Nugent

Okay, operator. Since there are no questions, I think we should go ahead and end the call. I'd like to conclude the CombinatoRx fourth quarter and year-end 2009 conference call. Thank you all for participating.

Operator

And ladies and gentlemen, thank you all for your participation in today's conference call. This concludes the presentation and you may now disconnect.

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