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NPS Pharmaceuticals, Inc. (NASDAQ:NPSP)

Q1 2010 Earnings Call Transcript

May 5, 2010 5:00 pm ET

Executives

Susan Mesco – IR

Francois Nader – President and CEO

Luke Beshar – SVP and CFO

Analysts

Alan Carr – Needham & Company

Jim Birchenough – Barclays Capital

John Stevenson – Summer Street Research

Leah Hartman – CRT Capital Group

Ling Wang – Brean Murray

Operator

Good day ladies and gentlemen, and welcome to first quarter 2010 NPS Pharmaceuticals earnings conference call. My name is Conner, and I will be your coordinator for today. At this time, all participants are in a listen-only mode. (Operator instructions)

I would now like to turn the call over to your host for today, Ms. Susan Mesco. Please proceed.

Susan Mesco

Thank you, and welcome to today’s conference call to discuss our financial results for the first quarter of 2010. Before we start, let me remind you that today’s call will include forward-looking statements based on current expectations. Such statements represent our judgment as of today and may involve risks and uncertainties. Please refer to our filings with the SEC, which are available from the SEC or our Website for information concerning the risk factors that could affect the company.

Joining me on today’s call are members of our management team, including our President and Chief Executive Officer, Dr. Francois Nader; and our Chief Financial Officer, Luke Beshar. To begin, it is now my pleasure to turn the call over to our Chief Executive Officer, Dr. Nader.

Francois Nader

Thank you Susan and good afternoon. Thank you for joining us on our first quarter 2010 conference call. I am happy to report that we have made important corporate and clinical progresses for this year. We generated more than $90 million of new capital through the monetization of our REGPARA royalties and more recently the public sale of common stock. The secondary equity offering was very successful in terms of execution, quality of investors and market recession. We welcome our new shareholders and we look forward to their continued support.

With two Phase 3 registration programs advancing and the financial resources to take us beyond topline results, we are now well-positioned to deliver multiple catalysts in the coming year. Let’s start with GATTEX or teduglutide. This is our GLP-2 analog that we are initially developing for short bowel syndrome, a serious malabsorption order associated with chronic dependence on parental nutrition for intravenous feeding.

Our Phase 3 study known as STEPS continues to go well with the next key milestone being achieving for randomization and then reporting topline results in late 2010 or early 2011. For those of you who may be new to the entire story, we are advancing the STEPS registration study to confirm previously stated findings that GATTEX safely reduces parenteral nutrition requirements of short bowel syndrome patients. STEPS will randomize 86 patients and the primary endpoint is a 20% or greater reduction in parenteral nutrition requirements.

In addition to STEPS, we are conducting an open-label study known as STEPS 2, in which patients who participate in STEPS, can receive up to 24 months of GATTEX therapy. We are pleased that more than 90% of patients who have completed 24 weeks of treatment in STEPS have elected to enroll in the STEPS 2 continuation study. In (inaudible) to our clinical activity for GATTEX in short bowel syndrome, we are ramping up a number of activities to support 2011 regulatory submission. Manufacturing and CNC related activities are a key focus this year, including the production of validation and commercial scale batches.

We also continued to advance our commercialization planning activities. We have completed comprehensive market research for GATTEX in short bowel syndrome, and we are now defining a commercialization plan. I would like to now turn to our Second Phase 3 registration program, NPSP558 in hypoparathyroidism. NPSP558 is our full-length recombinant parathyroid hormone 1-84 that we are developing as a hormone replacement therapy for patients who have hypoparathyroidism. Hypoparathyroidism is an orphan indication characterized by low serum calcium or hypocalcaemia that can lead to neuromuscular symptoms and bone impairment, as well as to serious complications like brittle bones, tetany, seizures or psychosis.

In the absence of an approved treatment for hypoparathyroidism, it is currently managed palliatively with hydrosis [ph] of calcium and Vitamin D analog supplements, which over the long term can lead to organ calcification and kidney failure. If approved, NPSP558 will be the first hormone replacement therapy to all the orphan indication. Patient enrollment in our Phase 3 study named REPLACE continues to progress well. We remain on track for hitting our enrollment objective later this year and reporting topline results in 2011.

To remind you, REPLACE is our 24-week double-blind, placebo-controlled registration study of NPSP558 in hypoparathyroidism. The primary endpoint of this study is achieving normal calcaemia while reducing calcium and Vitamin D analog supplementation by at least 50%. In addition to our clinical work, our regulatory affairs and technical operations team are preparing for future regulatory submissions for NPSP558 including a number of CNC related activities.

So, to summarize, 2010 is off to a great start. We have two Phase 3 registration programs that are progressing on our stated timeline and we are prepared to deliver multiple key catalysts in the coming years, including fully randomizing STEPS and reporting topline results of GATTEX in short bowel syndrome, enrolling the last patient in STEPS 2 and open-label continuation study of STEPS, hitting our enrollment target for REPLACE in hypoparathyroidism, ensuring regulatory and supply chain regimen for the timely and complete filing of new drug applications and planning for the launch of our first product in 2012.

We look forward to updating you on our progress on future calls. With that, I will turn the call over to Luke to discuss our financials. Luke?

Luke Beshar

Thanks Francois and good afternoon to everybody. On the financial front, we also made great progress for this year, with our most recent notable accomplishments being two very successful financing transactions that provided over $90 million and resulted in significantly enhanced balance sheet and extended runway.

The first quarter of capital was raised in March, when we realized over $38 million of non-dilutive capital through the monetization of a portion of our REGPARA royalty rights. And subsequent to the end of the first quarter, we completed the second step of our financing plan for executing a highly successful secondary offering of common stock, resulting in net proceeds of approximately $53 million.

After including the proceeds from the sale of stock, our first quarter pro forma cash position was over $154 million, which extends our financial runway to key milestones in 2010 and in 2011. We are obviously pleased to see the market reaction growing and after the offering, delighted with the quality of the investors who opted to invest in our future. We welcome our new investors to NPS and look forward to rewarding our existing and new shareholders in the months and years to come.

I would like to move to the highlights of our first quarter financial results. Starting with revenue, while royalty-based portfolio continues to be a valuable piece of our business delivering year-over-year growth of 24%. The growth was driven by pre-effect royalties increasing 15%, REGPARA royalties increasing 60%, Nucynta providing $200,000 of royalty revenue this year versus zero last year, as this product was only introduced by Ortho-McNeil in June of 2009, and last but certainly not the least, the Sensipar royalties have grown 21% over $14 million for the first quarter.

With respect to Sensipar, we have some additional highlights in the quarter. First, for the fourth consecutive quarter, (inaudible) did not reserve any Sensipar royalties payable to NPS. For our new investors on the call, this relates to ongoing manufacturing process patent litigation related to Cinacalcet filed by Teva against Amgen. Second, Amgen recently launched a Phase 2 study Sensipar in primary hypoparathyroidism, which treated $2 million milestone for NPS. And third, during the first quarter, we retired (inaudible) of Sensipar backed non-recourse Series B notes, leaving roughly $46 million remaining.

As a result, we currently anticipate that within the next 12 months, the balance of the Series A notes will be fully retired and the repayment of the Sensipar backed non-recourse Series B notes will begin. As a reminder, we monetized certain of our royalty rights for Sensipar, Preotact, and REGPARA as non-recourse debt. With cash flow from the royalties returning to NPS, GAAP for the respective obligations are repaid. Sensipar is obviously our largest royalty stream, with 2009 royalties of approximately 65 million, and the first quarter of 2010 delivering year-over-year growth of 21%. We are obviously encouraged that the repayment of Sensipar backed Series A notes and the commencement of the repayment of the Series B notes are now both on a near term horizon. A final note on the royalties is that we set the royalty revenue stream remains unencumbered asset of the company.

Turning to expenses, year-over-year R&D expenses increased as expected to $9.5 million from $5.8 million last year due to STEPS and REPLACE Phase 3 registration studies being in full stride and the STEPS 2 continuation trial ramping up. Our G&A expenses for the first quarter of $4.3 million improved by 6% versus last year due to our continued focus on expense management. Our first quarter cash burn $13.3 million, and we continue to expect our full-year cash burn to be between $75 million and $90 million.

Consistent with our definition in prior periods, our first quarter cash burn excludes the $38.4 million of cash proceeds from the monetization of REGPARA and roughly $900,000 of certain increases in the value of our auction rate security investments.

So, to summarize in the financial front, we continue to see strong revenue growth from a royalty-based portfolio. We remained focused on actively managing cash and expenses. Our financial position is significantly enhanced with more than $90 million of new capital through very successful recent financing activities, and most importantly, with approximately $154 million of pro forma cash at the end of March, we have a financial runway that extends well into the future and will allow us to take our two key programs, two key milestones in both 2010 and 2011.

With that, I will turn the call over to the operator to begin our Q&A session. Operator?

Question-and-Answer Session

Operator

(Operator instructions) And the first question comes from the line of Alan Carr from Needham & Company. Please proceed.

Alan Carr – Needham & Company

Hi. Good afternoon, everyone.

Francois Nader

Hello Alan.

Luke Beshar

Hi Alan.

Alan Carr – Needham & Company

You mentioned that you have done some more market research around GATTEX. Can you fill us in on that?

Francois Nader

Sure. I mean, as with any commercialization plan, we are gearing up to fully understand the market and this is particularly important because it’s an orphan indication. Actually, it applies to both hypoparathyroidism and short bowel syndrome. Specifically for short bowel syndrome, we looked really at three aspects of the market. One, we looked at reimbursement and pricing and this was very important in the current environment as you can very well imagine, and we were very pleased to see that the reimbursement for GATTEX in short bowel syndrome should not represent an issue going forward. The second aspect is the patient accessibility of GATTEX for the treatment of the short bowel syndrome. And here also, we are very pleasantly surprised by the uptake, potential uptake that the patients could be expected to have with GATTEX. Effective in that, it is once-a-day subcutaneous injection, but also these are very sick patients with no treatment for their dependence on parenteral nutrition.

So, virtually all the patients that we interview said that they will try GATTEX and this will speak on the profile of GATTEX as it was generated to our first Phase 3 study. And the third aspect which is very important is the prescribers are – so we talked to the gastroenterologists and to a number of other specialists so that you understand the dynamic around treating short bowel syndrome. And here also we experienced a very good respect from the GI docs as to GATTEX, because frankly we don’t have much of any other alternative and they were very open to trying GATTEX going forward.

Now, the next phase of our market research will zoom in on either to find our top prescribers and segment the market and continue to dig into outside the qualitative aspects of this market, and this effort will continue between now and launch.

Alan Carr – Needham & Company

Great. And then anymore supplemental preclinical or clinical trials still needed for your NDA around GATTEX?

Francois Nader

Well, let’s start with clinical and the full NDA. This is an effort, Alan, that we discussed it last year where we looked at the requirements of the NDA and went through a very exhaustive, very, very comprehensive process using our internal resources and external consultants. That said, that is what we have, and what is that we will need to have a successful submission. Based on what I know today, I know that there are number of activities that are ongoing currently to complete what we need. But I also know that these activities will be completed on time based on our targeted filing date.

So, all this to say that we are working very actively on completing the (inaudible), our core deliverable. But also completing any additional work that would need to be done between now and filing, so, we are pretty much on track.

Alan Carr – Needham & Company

And you will give us, I guess updates on those as they are completed.

Francois Nader

Well, we will give you, what is probably the most important is an update on completing randomization for the GATTEX studies for STEPS. That is an important data point and obviously we will record topline results by the end of early next year. And these are probably the most important milestones that we will report.

Alan Carr – Needham & Company

Okay. Great, thanks.

Francois Nader

Sure Alan, anytime.

Operator

And the next question comes from the line of Jim Birchenough from Barclays Capital. Please proceed.

Jim Birchenough – Barclays Capital

Yes, hi guys, a few questions just in terms of the open-label extension to the STEPS trial, in the 90% that are rolling over, how does that compare to what you saw in the first trial? And as patients roll into the open-label extension, is there anything you are seeing in terms of some kind of bimodal response where certain patients improve and others remain stable that might suggest that one patient got placebo and one patient got drug, any added detail would be helpful? And then I have a follow up.

Francois Nader

Yes, that’s a very good question. In the first study, we have 90% of the patients who enrolled in the extension study. So, we are just about the same number, the same range. This number might change up or down as more and more patients will move STEPS to STEPS 2. So, 90% should be seen as a time point here today. I don’t know that we want to see anything. It is clear that half of the patients that will go into the extension will be placebo patients and half of the patients will be GATTEX patients, and we are very careful as with any drug that works and GATTEX is no exception.

Not to inadvertently blind the pivotal study, and this is something that our team here is very, very careful about. So, the individual investigator might see a difference that frankly we don’t want to know.

Jim Birchenough – Barclays Capital

And in the first trial, it strikes me that it was a bit of a cost spike exercise in making sure that the physicians followed protocol and didn't inappropriately take patients off therapy because of fluid retention or renal function. I just want to make sure that you are satisfied with the way the trial is proceeding from that perspective, in terms of trial conduct and anything you can say in terms of conduct of this trial versus the first trial?

Francois Nader

The only thing I can say, Jim, is we have learned a lot from our first experience and frankly the size and investigators have learned a lot and generally we have learned a lot about how does that work. It’s obvious to say if you take, and you might be referring to the dropout rate in the first study, where we had a number of patients who actually dropped out, and when we look at their medical history and the reasons for their dropout, maybe they shouldn’t have been dropped out. And this particular study, the new study for any patients who might be dropped out, there is a contact between the investigator and our medical team here, and they talk about it. And frankly more often than not, we can tell the investigator that this is a normal expected effect of the drug and the patients could continue. This being said, ultimately the decision is for the primary investigator, that’s very clear.

But based on our learning as to how this drug works and more specifically when it comes to fluid absorption which shows the reason for at least the dropouts [ph] the first time around, we are much more careful as to how the drug works and this impacts the other aspects which also had a number of dropouts the first time for the over absorption of medications that are orally absorbed. And now, also we have warned the patient and the physician to be careful in titrating down if you need any oral medication or any medication that would orally absorb for these patients. So, all in all, one can say that we have a much better control of the study, and a much, much better interaction our medical team here and the investigators.

Jim Birchenough – Barclays Capital

Just a final question, and that is as you scale up to commercial scale, is there any sense from FDA that you will need to do a bridging study from a clinical trial material to bridged commercial scale?

Francois Nader

No, we don’t, no we don’t. We have very much the same materials that we don’t need to break.

Jim Birchenough – Barclays Capital

Okay, great. Thanks for taking the questions.

Francois Nader

Thank you Jim.

Operator

And our next question comes from the line of John Stevenson from Summer Street Research. Please proceed.

John Stevenson – Summer Street Research

Hi, congratulations on the quarter.

Francois Nader

Thank you John.

John Stevenson – Summer Street Research

So, just to follow up to Jim's questions regarding the discontinuation rate, based on your comments, are you – I mean, it sounded like you are maybe actually seeing a little bit of a lower discontinuation rate in this study. Is that an accurate read?

Francois Nader

Yes, I would not comment on the discontinuation rate until we really complete the study, complete the randomization. So, we have really two important processes going here. What I was referring to Jim was the dropout between randomization and completion of the study. We have a number of patients that are in this process now and frankly we will not know the final number until the study is completed. Now, for the part of the study that is between enrolment and randomization, it is true indeed that we have seen a lower dropout rate compared to the first one.

John Stevenson – Summer Street Research

Okay. And based on that aspect, is there any sense that you might end up with a slightly overpowered study based on the number of patients entering the initial phase, and your early experience with discontinuation during that phase?

Francois Nader

By design, we are very, very conservative in determining the power of the study, just determining the power of patient and then to give you a very practical example. The response rate in the first study for the low dose was close to 45% or so. And the response rate for the high dose was 25%. The response rate for placebo was 6%. So, we could have taken the delta between 45% for high dose and 6% for placebo. We decided not to do that. We decided to be more conservative and assume that the response rate would be somewhere between the high dose and low dose, and we picked up 35% at the midpoint versus 6% in placebo. So, instead of the delta, 45 minus 6, now it is 35 minus 6. So, all this to say that and our randomization one-to-one also was a different way of being conservative. So, all in all, overpowering the study is not something that is the best thing.

I think that the reverse could have been damaging. We certainly did not want to end the trial and probably we added more patients than we needed maybe, but we will know when this study will be completed.

John Stevenson – Summer Street Research

Okay. And on REPLACE, how is enrollment been progressing in recent months since you last updated us?

Francois Nader

That has progressed well, and we certainly don’t want to claim victory too early, it probably went to a very slow start, but since the beginning of this year, the enrollment has picked up quite nice. And so, we are still maintaining the guidance of second half of this year just again to be conservative, but the enrollment phase is exactly where we want it to be. So far so good.

John Stevenson – Summer Street Research

Okay. The very last question, expenses came in a bit lower than I was expecting in general. Is this kind of – what kind of general speaking trend should we expect for some of these lines like R&D and SG&A?

Luke Beshar

Hi John, this is Luke. We don’t guide by quarter. We haven’t changed our full-year guidance and we do expect a fair amount of these expenses to ramp in over the balance of the year. So, I would encourage you not to look at the quarter, but really look at the full year.

John Stevenson – Summer Street Research

Okay. Thanks.

Francois Nader

Thank you John.

Operator

And the next question comes from the line of Leah Hartman from CRT Capital. Please proceed.

Leah Hartman – CRT Capital Group

Thanks for taking my question. Luke, I was going to ask you to walk through the parts of the debt schedule, but I saw that the Q was out. So, I am all set. My other questions have been answered.

Luke Beshar

Terrific.

Leah Hartman – CRT Capital Group

Great. Have a great quarter.

Francois Nader

Thanks. Leah, I am –

Leah Hartman – CRT Capital Group

Well, I would be happy to have you walk me through.

Francois Nader

Have a good evening.

Leah Hartman – CRT Capital Group

All right.

Operator

And the last question comes from the line of Ling Wang from Brean. Please proceed.

Ling Wang – Brean Murray

Thank you. Good afternoon. Thank you for taking my questions. Most of my questions have already been asked, but just wanted to get a better sense about when the topline data for STEPS can be out, more specifically, after all patients, after all of them are treated for six months, how long do you or would you think it will take you to pin up the data and report it?

Francois Nader

Difficult to answer your question, the sooner the better, that’s all I can say, and this is what our team is gearing up to do. And the good news that is with the use of the e-diary, the process of cleaning up the data should go quicker than if we were still using a paper diary. So, this is something that we keep in mind. We have done this once before, so we know what to expect. So, all just to say that I will not give you, Ling, I am sorry, a specific timeframe, but it’s fair to say that we will do it as quickly as reasonably possible. This all being said, we have also a partner that we have to manage the pivotal study that is co-developed to fund this by NPS and Nycomed, and in general, smaller companies are more agile than bigger ones, but I know also that our colleagues are, Nycomed are also anxious to get these results as quickly as possible. So, stay tuned.

Ling Wang – Brean Murray

Okay. Great. And also on Sensipar, I was wondering whether you can give us sort of an update on where the oral drug, the bond on it will be treated going forward?

Luke Beshar

Yes, we don’t have a lot of visibility on that, Ling. We understand that the final guidelines are supposed to be issued, most recent understanding is sometime before the middle of the year. And we understand this is fair amount of pushback to exclude small molecule or from that bundling, but beyond that, we don’t have a lot of visibility.

Ling Wang – Brean Murray

Okay. Thank you.

Francois Nader

Thanks very much, Ling.

Operator

And we have no further questions at this time.

Francois Nader

Thank you for your questions. 2010 is an important year for NPS and I am really confident that we are fully equipped to deliver on our objectives. We look forward to sharing additional progress with you on future calls and we certainly appreciate your continued support. Have a great day. Good evening.

Operator

This concludes the presentation for today. Ladies and gentlemen, you may now disconnect. Have a wonderful day.

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