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Executives

Stephen Willard – CEO

Sian Crouzet – Principal Financial Officer

Analysts

Matt Kaplan – Ladenburg Thalmann

David Moskowitz – Madison Williams

Flamel Technologies SA (FLML) Q3 2010 Earnings Call Transcript November 5, 2010 8:30 AM ET

Operator

Good morning, ladies and gentlemen, and welcome to the Flamel Technologies third quarter 2010 earnings conference call. Please note that this call is being recorded. There will be a question and answer session, following today's presentation. (Operator Instructions)

I would now like to turn the call over to Mr. Stephen Willard, CEO. Please go ahead, sir.

Stephen Willard

Yes. Thank you. Good morning, everyone and thank you for joining our call today. As always, we open with the forward-looking statement language, which is set out at the conclusion of yesterday'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.

Since our last quarterly call in August, we have been progressing well on our major projects. Last month, we announced the achievement of the 3 million euro clinical development milestone and our development of an extended release formula for Merck Serono. The molecule we've been working on with Merck Serono is beta interferon 1a. Yesterday, we announced the achievement of a second additional milestone for the same program. According to the terms that we initially negotiated in 2007, we will receive a further $1 million milestone payment.

We also announced last month that we have received a letter from the FDA in response to our Citizen's Petition that we submitted regarding Coreg CR. Our petition detailed our concerns that any generic formulation submitted for approval to the FDA be concerted according to the criteria applied to the submission of Coreg CR. We particularly focused on the demonstrated safety and efficacy of Coreg CR in the treatment of congestive heart failure patients. A copy of the FDA's letter is available on our website.

We are very pleased with the portions of our Citizen's Petition which were granted and we believe that the FDA has taken a very serious and thoughtful approach to the issues we raised for the protection of patients taking potential generic copies of Coreg CR.

As we have previously discussed, URL Pharmaceuticals filed an ANDA application for Coreg CR approximately two and a half years ago. To our knowledge, they are the only company that has filed an ANDA application for an extended release carvedilol phosphate formulation and they are the only company to have responded to the Citizen's Petition that we submitted to the FDA. To date, no approval from the FDA for any extended release carvedilol phosphate formulation has occurred.

I would like to ask Sian Crouzet, our Principal Financial Officer, to review our third quarter financial results and then I will discuss the Merck Serono program and other ongoing work before we open the call for questions. Sian?

Sian Crouzet

Thank you, Steve. There are a couple of elements I would like to highlight in our third quarter results. Firstly, they do not include the two milestones we have recently achieved on the development program with Merck Serono.

The first milestone of 3 million euros that was announced last month was paid this week. The second milestone of 1 million euros referred to in our press release last night is expected to be paid in the next month. Both of these events will impact our fourth-quarter earnings and cash position.

Now, in relation to our third quarter results, we have witnessed a drop in revenues, year on year. As discussed last quarter, we have advanced a number of projects and as a consequence work on these projects is correspondingly reduced while clinical trials are ongoing. That said, we are maintaining a steady pipeline of feasibility projects with different partners.

Product sales and services relating to the production of Coreg CR micro particles were $1.8 million compared with $2.6 million in the third quarter of 2009. And other revenues, primarily royalties on the sales of Coreg CR were $2.1 million compared with $2.5 million in the year ago period.

Our costs and expenses have declined during the third quarter from $13.2 million in 2009 to $11.2 million. The decline is across all three categories, as we maintain our commitment to strict cost control in light of reduced revenues. Production costs declined from $2.6 million to $1.5 million in the current period. R&D declined from $7.5 million to $6.7 million and SG&A from $3.1 million to $2.9 million.

Net loss for the quarter was comparable with the third quarter of 2009, at $3.3 million and a net loss per share of $0.14. We finished the third quarter with cash and marketable securities of $32.1 million. And as mentioned at the outset, the two recently announced milestones from Merck Serono will impact our fourth quarter financial results.

I will now turn the call back over to Steve.

Stephen Willard

Thank you very much, Sian. Obviously, we are especially pleased with the progress that we continue to make in our work with Merck Serono on an extended release formulation of beta interferon.

Last night, we announced that we have achieved a second milestone during the fourth quarter. According to the terms agreed, we will receive 1 million for that milestone. And that's two milestones achieved with Merck Serono in the space of just one month.

What is important is that we're making excellent progress in the development of the formulation, which we believe is potentially a strong value driver for our company. Beta interferon is a biological molecule that is indicated for the treatment of multiple sclerosis.

There are three major brands of beta interferon on the market. Merck Serono markets Rebif, which is interferon beta 1a. Bayer Schering markets Betaseron, which is beta interferon 1b. Both of these are injected subcutaneously and are administered once every two days or three times a week.

Biogen also markets a beta interferon, which is administered as an intramuscular injection. This is an obvious problem for many patients, as intramuscular injections involve a larger needle and are more difficult to administer, especially if one suffers from multiple sclerosis.

We believe that an extended release formulation of beta interferon for subcutaneous injection to be an important improvement for patients and their caregivers. We’re excited to be working with Merck Serono on the development of this formulation and with the progress that we are able to share with all of you today.

The development program is important in another respect as well. No one has successfully developed an extended release formulation of beta interferon to-date. It is extremely difficult, because competing technologies use an approach whereby another molecule is grafted onto the beta interferon molecule.

Because of the shape of beta interferon, however we understand that this has a very strong effect on the bioactivity of the molecule. Medusa, on the other hand because it works through the creation of a non-covalent bond, does not reduce bioactivity. It is the native molecule that is released after injection.

We believe that this approach has a number of benefits, not just for beta interferon but for most proteins, peptides and other therapeutic agents. Flamel's approach by delivering unmodified therapies, is increasingly appreciated by partners with whom we are in discussions.

We offer many distinct advantages over competing technologies, such as pegylation. The first is obviously that in using the Medusa platform we are able to affect a controlled release of a wide range of molecules by taking advantage of widely shared characteristics, such as hydrophobicity or the charge of the molecules. This means that we can work on molecules where pegylation doesn't seem to work.

We believe that the regulatory pathway is simplified for extended release formulations of molecules that are already approved. Further, the need for new toxicology and tolerability work is reduced as well.

And finally, we believe that we can control the effective rate of release in the body better than pegylation, which may allow us a further advantage in terms of efficacy and safety. That is obviously one of the main goals of the clinical trial that is being sponsored by the French agency ANRS, to compare our formulation of interferon alpha XL plus ribavirin versus PegIntron plus ribavirin.

But our Medusa platform has other significant advantages, as well as the potential to improve efficacy and reduce side effects. The new Medusa program that we entered into this past quarter is to assess the applicability of Medusa in solving threshold issues of aggregation in antibody development. We believe that this is a potentially important advance that may allow for the development of certain molecules that might not otherwise enter the clinic.

The other agreement that we signed last quarter is also interesting. It is a Micropump project. We have been engaged to develop a once-daily formulation of a drug that is currently marketed and which currently uses a competing drug delivery technology in order to achieve twice-daily doses.

So, we’ve been engaged to provide a better controlled release product than one which is currently on the market with a competitor’s technology. Partners are realizing that Micropump really is a best-in-class technology and provides advantages over the other technologies available to big pharma.

With that, we would now be pleased to take your questions. Evelyn?

Question-and-Answer Session

Operator

Thank you. (Operator Instructions) We’ll first go to Matt Kaplan, Ladenburg Thalmann. Mr. Kaplan, your line is open. Mr. Kaplan?

Matt Kaplan – Ladenburg Thalmann

Yes. Hi.

Operator

Please go ahead.

Matt Kaplan – Ladenburg Thalmann

Can you hear me?

Stephen Willard

Hi, Matt.

Matt Kaplan – Ladenburg Thalmann

Hi. Good morning, Steve. How are you?

Stephen Willard

Very well, thanks. How are you?

Matt Kaplan – Ladenburg Thalmann

Thanks for taking – I’m doing well. I am doing well. Thank you for taking my questions this morning. So, somehow you managed to get a number of milestones from Merck Serono, after waiting a long time to get the first. Congratulations on that.

Stephen Willard

Thank you. Actually, the first was $7 million a year and a half ago. Well, actually…

Matt Kaplan – Ladenburg Thalmann

Then I should say the second.

Stephen Willard

This is the third and the fourth milestones from Merck Serono.

Matt Kaplan – Ladenburg Thalmann

Very nice, very nice.

Stephen Willard

But one of them was the one we expected, according to guidance from our partner, to expect in the summer. The summer came in October. Sorry about that. But I am very pleased that not only did we accomplish that, but then even further progress has been made in the short period of less than a month.

Matt Kaplan – Ladenburg Thalmann

You mentioned in your prepared remarks you still expect to get one additional, perhaps, milestone, or that’s remaining somewhat from the program, as it moves away through the clinic. When should we expect that, in fast succession as well?

Stephen Willard

Well, I think I said that we accomplished – we achieved two within a month. Whether we get another milestone, I don’t think I commented on whether we are going to get another milestone from Merck Serono this year. That and all milestones will depend on our partners.

Operator

Thank you, Mr. Kaplan. We’ll next move to David Moskowitz.

Stephen Willard

I apologize, Evelyn. Could we relax the rule of one question and one follow up?

Operator

Certainly. Mr. Kaplan, do you have anything further?

Stephen Willard

Please, let people – that’s my mistake, but I’d like people to be able to continue.

Matt Kaplan – Ladenburg Thalmann

Just a couple more things. Can you just give us a little color in terms of what these milestones represent that you received from Merck Serono? And then, number two, I guess that’s two questions in here, with respect to additional partnerships or licensing agreements, what’s your sense in terms of being able to get something done by year-end this year?

Stephen Willard

Sure. Well, the – I believe the press release for the October milestone was clinically related. And the milestone that we just announced yesterday goes beyond the clinic and is – signifies further development beyond the clinic, but that’s as much as I am allowed to say about that without Merck Serono’s further permission.

In terms of other – in terms of our license agreements, which are another one of what we established as our goals for the year, we’re currently in negotiations which could meet or exceed this goal regarding license agreements.

Matt Kaplan – Ladenburg Thalmann

Right. And a comment just on the recent Citizen’s Petition actions with respect to Coreg CR that have been going on and I guess the lack of approved generics so far that we’ve seen?

Stephen Willard

Two separate things, the Citizen’s Petition and then what other people are doing. I actually was delighted by the Citizen’s Petition process. I think the FDA took the – what I consider to be the very important safety and protection of patients issues quite seriously. The elements that were granted I think were fundamental to the protection of patients.

As you know, I think it’s extremely rare to have Citizen’s Petitions actually be granted, as opposed to being denied; the vast majority are denied. But I think in a 14-page well-reasoned letter the FDA took a great deal – paid a great deal of attention to the issues we raised and I found it to be a very gratifying process. I think the portions that they granted of our Citizen’s Petition will be quite significant for protection of patients, which was our goal in filing the Citizen’s Petition.

With regard to its impact on URL, which is the only filer, it’s been three weeks since the Citizen’s Petition. All I can say is they haven’t been approved. We don’t know anything about their filing. We don’t know about their conversations with the FDA. We do know that the FDA takes carvedilol extremely – as an extremely important drug for a very fragile group of patients and so I am confident that whatever the result there that the FDA is going to do the right thing. But right now, what we know is that URL continues not to be approved and what they do is between themselves and the FDA.

Matt Kaplan – Ladenburg Thalmann

Thanks a lot for taking my questions.

Stephen Willard

Thank you very much, Matt.

Operator

Thank you. Next we will hear from David Moskowitz, Madison Williams.

David Moskowitz – Madison Williams

Thanks. Good morning, everyone.

Stephen Willard

Good morning, David.

David Moskowitz – Madison Williams

Morning, Steve. So, back on the Coreg CR situation, can you talk about patents that are currently granted or pending that any new filer would have to certify against? So, patents that are in the orange book or patents that you think are pending that could block?

Stephen Willard

Sure. There are the patents that are currently in the orange book. GFK made the choice with regard to the carvedilol phosphate composition of matter patent, vis-à-vis URL Mutual, but that would not necessarily be given to anybody else. We have patents that are in the process of being granted now, with regard to our Micropump technology, which we would expect to be additional elements of what's in the orange book regarding Coreg CR and I think our patent protection is strong.

David Moskowitz – Madison Williams

So, I guess my question is, if another filer were to come, would they in fact have to challenge the patents that are in the orange book? In other words, would we have to see a certification from a new challenger?

Stephen Willard

I believe we would.

David Moskowitz – Madison Williams

So, your statement that there’s no other filers out there, it should be pretty solid, there shouldn’t be any submarine applications going through the FDA, because, again, they would have to certify against the patents that are in the orange book?

Stephen Willard

Yes, that's exactly what I understand.

David Moskowitz – Madison Williams

Okay. Can you talk about your guidance – you guys have talked about being cash flow neutral to positive this year. Can you talk about what cash burn has been thus far and what do you expect through the end of the year?

Stephen Willard

Sure. As I said, we have – we're currently in negotiations which could meet or exceed the goals for the year that we established regarding license agreements. And if those are successful, I think those would necessarily, at least based on the terms that we are discussing, make us quite confident of being cash flow positive for the year. So, I think the two are interrelated. Sian, what was our cash at the end of last year?

Sian Crouzet

On a year-to-date position, cash burn of $12 million.

Stephen Willard

What was the cash at the beginning of the year – at the end of last year?

Sian Crouzet

Around $44 million.

Stephen Willard

$44 million. So, we have $32 million plus $5.5 million from the Merck Serono milestones.

David Moskowitz – Madison Williams

Currency impact as well, right?

Stephen Willard

Yeah. But I'm just talking in dollars right now. And so – trying to keep it in constant currency, it's easier that way. And so I adjusted the Merck Serono milestones into dollars. It's 4 million euros per se and I think at current exchange rate works out to $5.6 million. But I think the – in order to reach the goal we set for ourselves at the beginning of the year, you can do the math, I think that means there's $4 million $4.5 million that we would need to make up.

David Moskowitz – Madison Williams

But you do keep your cash in euros, so even though you're talking in constant currency, you've been penalized by the currency movement away from you?

Stephen Willard

Absolutely.

David Moskowitz – Madison Williams

Which is I think about 10%, is what I've heard on some other calls, so that's probably $4 million of it, but generally, you're still – so if we are just talking dollars to dollars, you're talking about a delta of about $5 million and you expect that if you close some of the transactions you're talking about this year you could true that up?

Stephen Willard

Absolutely.

David Moskowitz – Madison Williams

And so, can you talk – I think Matt asked this and I missed the answer. Can you talk about the number of possible deals you could have before year-end and how many you'd like to at least tell us that you think you can get out of that?

Stephen Willard

Yeah. The next six weeks will be crucial. The goal we set for ourselves at the beginning of the year was another two license agreements and we're in negotiations on more than those. I think we have talked about a variety of the things that we are negotiating about.

And while we certainly won't get all of them, I think at this point we still think that we could meet or exceed the goal regarding two more license agreements. It will obviously depend on our partners in the next six weeks, but at the moment we feel optimistic.

David Moskowitz – Madison Williams

So, just to play a little cue here, if you're saying two or more, it sounds to me – you're going right past one or more, so it sounds to me like one should be pretty good odds.

Stephen Willard

Yes. The odds we think are pretty good for two. They're even better for one. But not as good for three.

David Moskowitz – Madison Williams

Okay. That's good. All right. A couple more. Let me just hit the P&L a little bit. So, R&D was definitely low this period and I'd just like to try and understand how that flows through the end of the year, so we can model appropriately and make sure that at least for now we're at least reasonable on our estimates.

So, I was expecting more along the lines of what you saw in the second quarter, about $8 million you did about $6.5 million. Why was that a little bit low and what should we expect in the fourth quarter? What are some of the ebbs and flows in the fourth quarter?

Stephen Willard

Sure. As Sian said in her remarks, as we add these programs in, initially we do the feasibility work and prove the concept and develop the formulation. It then goes into clinical trials. As the results come out of clinical trials, the R&D revenues that we get on a project, on average, I would say, again on average, triple.

And so we have, as we have said, this year a number of projects in the clinic. They are coming out of the clinic and as they go into license agreements, we can expect to see R&D from successful projects double or triple.

We have had sort of a quiet period while we've been going through the clinical trials. As we signaled a couple of quarters ago, those are coming out of the clinical trials. The license agreements seem to be moving well. And we would expect the R&D to move up with successful license projects very substantially. I'm not sure how much that's going to hit the fourth quarter, because we then agree budgets and whatever.

I expect successful license agreements and things coming out of the clinic to have a material impact on our 2011 R&D line. But I would expect that it would be difficult to have a significant increase in the fourth quarter, just because those things are being – those budgets are being approved, but the work isn't actually being done at a materially higher level in the fourth quarter.

David Moskowitz – Madison Williams

Okay. You're talking about R&D expense, not R&D revenues, right?

Stephen Willard

No. I'm talking about R&D revenues.

David Moskowitz – Madison Williams

Okay. So, R&D expense is my question. It was down in the third.

Stephen Willard

I think it will continue to be constant. And we do expect a substantial upswing in R&D income over the course of the next few quarters in the coming year, because of the success of our products in the clinic and licensing. But I think we will be able to do that with a constant R&D spend.

David Moskowitz – Madison Williams

Okay. And same thing on SG&A, real quick. It was pretty steady throughout the year, SG&A. Is there any reason for a meaningful swing in that line item in the fourth quarter?

Stephen Willard

Absolutely not. SG&A, we continue to push it down and I see no reason to increase it.

David Moskowitz – Madison Williams

Okay. Back to some qualitative things now and I'll work you through for the next question. The soonest revenue we could see from a Micropump product?

Stephen Willard

You mean in terms of milestones and license fees and things like that?

David Moskowitz – Madison Williams

No. Product actually being marketed approved and marketed.

Stephen Willard

Okay. So you're talking additional royalties beyond the Coreg CR?

David Moskowitz – Madison Williams

Correct.

Stephen Willard

Our results continue to be strong. We could – it will depend on regulatory work, but we haven't changed our view with regard to having another product or two potentially on the market next year.

David Moskowitz – Madison Williams

Excellent. And lastly, on the Serono additional milestone, I recognize you guys can't say much about it, but you have said beyond the clinic. So I'm trying to think of when a product advances into human testing, what's beyond the clinic. And I guess the only thing I can think about would be something related to the manufacture of the product. So, I don't know how you can speak to that, but is there something else or am I in the right area?

Stephen Willard

I can't speak to it because, as you know, Merck Serono controls very carefully what we're allowed to say.

David Moskowitz – Madison Williams

So, let me ask it this way, then. Is there something beyond the clinic and manufacturing that I'm not thinking about?

Stephen Willard

It's not related to the clinic and it shows further development of the product beyond the clinical milestone which we announced in October.

David Moskowitz – Madison Williams

So, clinical meaning testing in patients and then something else beyond that. And again, I'm asking if it's – then there's manufacturing, packaging, manufacturing, I guess. And is there something else that I'm not thinking about, another area where you could achieve a milestone beyond that?

Stephen Willard

In view of Merck Serono's sensitivity, I'd like to leave it with the agreed language I have with Merck Serono. It is a further step beyond just a clinical step with Merck Serono which we think bodes well for the product going forward.

David Moskowitz – Madison Williams

Okay. Thanks a lot, Steve. I appreciate it.

Stephen Willard

Thank you, David.

Operator

(Operator Instructions). And it appears there are no further questions. Mr. Willard, I'll turn the conference back to you for any additional or closing remarks.

Stephen Willard

Okay. Well, thank you very much, Evelyn. Thank you all for your interest in Flamel. We think there are some very exciting developments that we have achieved, as we've discussed. Obviously, we have a very busy fourth quarter ahead of us and we look forward to speaking with you again as soon as circumstances warrant.

Thank you very much, once again, for your interest in Flamel and we hope to speak with you soon.

Operator

And that does conclude today's conference. Thank you for your participation.

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