SuperGen (SUPG) Q1 2011 Earnings Call April 27, 2011 4:30 PM ET
Mohammad Azab - Chief Medical Officer
Michael Molkentin - Chief Financial Officer, Principal Accounting Officer and Corporate Secretary
Timothy Enns - Senior Vice President of Corporate Communications & Business Development
Michael McCullar - Head of Discovery Operations
James Manuso - Chairman, Chief Executive Officer and President
George Zavoico - McNicoll, Lewis & Vlak LLC
Robin Davison - Edison Investment Research Limited
Good afternoon. My name is Courtney, and I will be your conference operator today. At this time, I would like to welcome everyone to the SuperGen Q1 2011 Earnings Conference Call. [Operator Instructions] I would now like to turn your call over to Mr. Timothy Enns, Senior Vice President of Corporate Communications and Business Development. Mr. Enns, you may begin.
Thank you, Courtney. Good afternoon, and thank you for joining us today for SuperGen's 2011 First Quarter Financial Results Conference Call. With me today are Dr. James Manuso, President and Chief Executive Officer; Michael Molkentin, Chief Financial Officer; Dr. Mohammad Azab, Chief Medical Officer; and Dr. Michael McCullar, Senior Vice President, Strategy and Discovery Operations. In a few moments, Jim Manuso and Michael Molkentin will deliver remarks on the 2011 first quarter 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 about our 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 this call, we'll make projections and forward-looking statements that are based on management's current expectations. Actual results may differ materially from these forecasts and projections due to various factors. There are significant risks and uncertainty 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 for the indications that we seek. Moreover, even if our products or product candidates are approved in the future, we cannot guarantee 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 actions of our strategic partners and collaborators with respect to the products we license or co-develop and patent disputes and litigation.
On April 6, 2011, SuperGen entered into a definitive merger agreement to acquire Astex Therapeutics Ltd., a U.K.-based biotechnology company. During today's conference call, SuperGen's management may make statements about the benefits of the transaction with Astex Therapeutics Ltd. which may contain additional forward-looking statements. With respect to SuperGen's ability to consummate the transaction with Astex and realize the benefits of such a transaction.
On April 22, 2011, SuperGen filed a preliminary proxy statement with the SEC, which has not been declared effective by the SEC. SuperGen plans to furnish the definitive proxy statement, with and if it is available, to its stockholders in connection with the proposed transaction. Pursuant to which, SuperGen would acquire Astex Therapeutics Ltd. Our filings with the SEC contain or will contain important information about the proposed transaction and related matters. Investors and stockholders are urged to read the preliminary proxy statement, which has not been declared effective by the SEC and the definitive proxy, when and if it is available, carefully.
More information on the proposed transaction can be found on the website www.astex-supergen.com. For additional information and discussion concerning the risk factors that affect the company's business please refer to the company's filings with the Securities and Exchange Commission. The company undertakes no duty to update forward-looking statements.
In the coming months, SuperGen will be presenting at various investor conferences, including the Noble Financial Capital Markets' Seventh Annual Equity Conference on May 17. Live and archived webcast of this presentation will be available through our Investor Relations section of our corporate website. Additionally, SuperGen will be hosting our annual shareholders' meeting in June.
I will now turn the call over to Dr. James Manuso, who will provide highlights of our accomplishments during the 2011 first quarter. Jim?
Thank you, Tim. Good afternoon, and thank you for joining us today for SuperGen's 2011 First Quarter Conference Call. SuperGen started the year by continuing to enhance an already strong financial position. In the first quarter of 2011, SuperGen earned net income of $5.5 million. This financial performance was driven primarily by an increase in royalty revenue from Dacogen, increasing approximately 19% compared to the same prior year quarter. We closed the first quarter with nearly $130 million in cash, cash equivalents and current and non-current marketable securities.
During the first quarter, we launched our first in human Phase I/II trial of SGI-110. Within the present quarter, amuvatinib will be the subject of a Phase II clinical proof of concept trial in small cell lung cancer. This trial has been designated the ESCAPE trial. And we announced the proposed acquisition of Astex Therapeutics Ltd., a leading U.K.-based biotechnology company.
Our committed partners, Eisai and Johnson & Johnson, continue to support the Dacogen franchise. They have reiterated their plans to file marketing applications this year in the elderly acute myeloid leukemia or AML indication in the United States and the European Union. the Dacogen Phase III data from the elderly AML trial will be presented at an upcoming medical conference.
The Phase I, II, MDS/AML trial of SuperGen's second-generation hypomethylating agent, SGI-110, continues to accrue patients. We are proud to be working with major cancer centers and the Stand Up To Cancer's Epigenetics Dream Team on this trial. We look forward to the potential end of Phase II clinical proof of concept data being available for review and announcement next year.
Our most advanced clinical stage drug, amuvatinib, or MP470 will commence the ESCAPE trial, a clinical proof of concept Phase II trial within this quarter. The ESCAPE trial will focus on the treatment of small cell lung cancer patients, who have either not responded to platinum etoposide treatment or who have relapsed shortly after such treatment. SuperGen will be presenting the final results of the Phase IB trial of amuvatinib in combination with standard of care chemotherapy, including platinum etoposide at the annual ASCO meeting in Chicago this June.
With respect to our corporate development initiatives, on April 6, we announced our plan to acquire Astex Therapeutics Ltd. A leading U.K.-based biotechnology company on the following terms: $25 million to be paid up front, 35% of the equity of the combined entity, and $30 million in deferred consideration to be paid in equity or cash at the discretion of the combined entity over a period of 30 months.
At our recently held joint Analyst Day on April 12, the management of Astex Therapeutics reported that at December 31, 2010, the company had total operating cash of approximately GBP 17 million or $28 million U.S. dollars to fund its operations in the near term. In addition to their strong cash position, Astex's management has estimated that milestone achievements from existing partnerships with GlaxoSmithKline, Johnson & Johnson, Novartis, and AstraZeneca could yield GBP 46 million or about USD $75 million over the next 3 years.
The purpose of our acquisition of Astex is to: fast-forward our business plan, expand our clinical stage pipeline, strengthen our discovery capabilities, and diversify our revenue streams with the variety of milestone payments and royalties that Astex can earn from its established corporate partnerships.
To be clear, if the acquisition is approved by shareholders, we will become Astex Pharmaceuticals Inc., a company with a robust pipeline consisting of 7 promising drugs in the clinic, 4 of which will be in Phase II clinical trials, and 3 of which will be partnered.
We believe the acquisition of Astex has the potential to generate substantial shareholder value in the years ahead. Astex Pharmaceuticals Inc., the combined entity to be listed on the NASDAQ under the call letters, ASTX, is anticipated to be a world-leading, cancer-focused enterprise delivering valuable therapeutics, targeting critical, unmet medical needs.
At the joint SuperGen-Astex Analyst Day, we discussed in detail the pipelines and technologies of both companies. The event was webcast live. We invite you to listen to the replay available on the website, www.astex-supergen.com.
At this time, I will turn the call over to Michael Molkentin, our Chief Financial Officer. Michael will provide details on our first quarter 2011 financial results, as well as our updated fiscal guidance for 2011. Michael?
Thank you, Jim. SuperGen reported positive financial results for the 2011 first quarter. Total revenues were $17.1 million compared with $14.4 million for the same prior year period. Total revenues for the 2011 first quarter consisted primary of royalty revenues of approximately $17 million, compared with $14.3 million for 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 2011 first quarter also include development and license revenue of $127,000 compared to a similar amount for the same prior year period. Development and license revenue represents the amortization of deferred revenue relating to payments previously received pursuant to the collaborative research and license arrangement with GSK.
Our total operating expenses for the 2011 first quarter were $11.6 million compared with $9.8 million for the same prior year period. The primary reasons for the increase in total operating expenses were: higher research and development costs due to increased activities during the period for product development and clinical trial programs associated primarily with SGI-110; incremental transaction costs associated with the recent announcement of the proposed acquisition of Astex Therapeutics; and an increase in stock-based compensation expense.
Approximately $1.3 million of additional expenses associated with the proposed acquisition was included in first quarter General and Administrative expenses, while non-cash stock based compensation expense was $712,000 for the 2011 first quarter compared with $247,000 for the same prior year period.
The company reported net income for the 2011 first quarter of $5.5 million or $0.09 per share, compared with $4.7 million or $0.08 per share for the same prior year period. Our overall operating cash position continues to improve. At March 31, 2011, the company had approximately $130 million in unrestricted cash, cash equivalents and current and non-current marketable securities compared to approximately $120 million at December 31, 2010.
Now I would like to comment on the revised financial guidance for 2011. The revised guidance essentially reflects anticipated transaction costs associated with the proposed acquisition of Astex Therapeutics. Please note that the revised financial guidance is prepared on a pre-deal closed basis.
Royalty revenue for Dacogen remains unchanged from our prior guidance and we continue to expect an increase of up to 5% from the prior year to a range from $52 million to $55 million. Development and license revenue continues to be estimated at $500,000, representing the recognition of deferred revenue relating to prior payments received pursuant to the research and license agreement with GSK. An additional payment of $700,000 related to the sale of our commercial franchise to Hospira Inc. is forecasted for 2011 and will be classified as gain on sale of products in our statement of operations.
Research and development expenses also remain unchanged from our prior guidance and are expected to be in a range from $29 to $32 million. The growth in expenses, compared to the prior year, is influenced by increasing costs related to our clinical trial programs primary for amuvatinib and SGI-110 and ongoing product development efforts intended to advance our product pipeline.
General and Administrative expenses have been revised upward to reflect the anticipated transaction costs associated with the proposed acquisition to a range from $12.5 million to $13 million for 2011. Based on the anticipated increase in G&A expenses, our net income has been modified downward from our prior guidance of less than $14 million for the year to net income of less than $12 million for 2011.
Included in total operating expenses are non-cash stock-based compensation expenses estimated at $2 million, while average annual shares outstanding on a pre-deal closed basis are expected to be approximately 61 million common shares.
Lastly, as of March 31, 2011, the company has, on a fully diluted basis, approximately $71.9 million shares outstanding, consisting of actual shares outstanding of 60.4 million, outstanding options of 11.5 million and no warrants.
This concludes the review of our financial results for the 2011 first quarter and comments on our revised annual financial guidance for 2011. I will now turn the call back to Dr. Manuso for closing comments.
Thank you very much, Michael. SuperGen is pleased to have started 2011 with significant financial and clinical achievements. By midyear, amuvatinib, our most advanced clinical product, will start the ESCAPE Phase II clinical proof of concept trial. For Dacogen, Eisai and Johnson & Johnson have guided to filing marketing applications for elderly AML in the U.S. and the EU before the end of the year. SGI-110, our follow on to Dacogen, will proceed in its Phase I/II trial with our scientific collaborators and the Stand Up To Cancer Epigenetics Dream Team, and our epigenetics collaboration with GSK is advancing.
We invite our shareholders to consider our recent proposal to acquire Astex Therapeutics Ltd. by reviewing the preliminary detailed proxy materials recently filed with the Securities and Exchange Commission.
SuperGen believes this acquisition will accelerate significantly our current business model and enhance future value creation. The proposed transaction is structured to allow our company to maintain its financial strength by retaining existing cash and royalty revenue while obtaining top-tier partnerships with nearly $2 billion in potential milestone revenue plus future royalties, a broader clinical pipeline to develop and monetize and an industry-leading discovery platform that can generate new drugs and serve as the basis for obtaining additional partnerships.
We look forward to updating you in the coming months on our progress. Dr. Mohammed Azab, Michael Molkentin, Dr. Michael McCullar, Timothy Enns and I are now ready to answer your questions. Operator, we'll take any questions at this point in time.
[Operator Instructions] Your first question comes from the line of Robin Davison, Edison Investment.
Robin Davison - Edison Investment Research Limited
A very strong quarter for Dacogen. I wonder if you could just sort of expound a little bit about the trends in the market, whether you're seeing or that you're aware that any expansion in market share or whether patients are taking it for a longer period or you're getting more market share in the AML indication perhaps?
A number of good questions, Robin. First, I agree this was a strong quarter and appreciate that we recognize revenue in arrears. So what that represents is revenue from the highest level of royalties that are provided for in the agreement. But that not withstanding your question also alludes to the market dynamics and appreciate, as I've indicated previously, the combined market for hypomethylators worldwide today is just shy of a $1 billion, and it appears to be growing at a rate of maybe 5% to 10%. Now within the United States, as you know, Dacogen and Vidaza share that market pretty much on a 40%-60% basis. 40% to Dacogen, 60% to Vidaza. That has remained relatively stable, although it might go up and down at the edges a little bit. As far as the trends within the clinical community, I'd like to ask Mohammad Azab to comment on that.
I don't think there's been any significant change in the trends. I think there's just more penetration on the hypomethylating agents and they're becoming more and more, of course, the standard of care for MDS and as we know there is also some usage in elderly AML, but I don't think there has been significant changes in terms of the usage of these agents in the clinic.
Your next question comes from the line of George Zavoico, MLV.
George Zavoico - McNicoll, Lewis & Vlak LLC
A couple of quick questions. I mean we've had the opportunity to learn a lot about the merger at the investor day so this is just sort of a follow-on small type question. With the GSK deal, I mean that was done before the merger. How do you see the potential Astex merger enhancing the GSK deal? It seems like they might be getting a little bit more benefit from this based on the combined capabilities of the merged company?
Well, certainly, it's our belief that our technologies are potent and capable of delivering significant value. In the same vein, appreciate that we already have a standing commitment and a dedicated team with respect to the GSK deal, and we don't expect that to be altered significantly. We have made good progress, particularly in the recent test, and I'll ask Dr. McCullar to comment on that generally, given that we can't give specifics as you know, George.
Clearly right now we're making a lot of progress with interests that we have. I think that right now what we're developing is really specialized biology to help address some of these questions in this field. So it's hard to predict right now what kind of things you might expect to see in that area. But overall, we expect the capabilities to be stronger.
George Zavoico - McNicoll, Lewis & Vlak LLC
And with regard to the general administrative expenses, the increased guidance, you mentioned that was mainly due to merger and acquisition costs. Things like that will be pretty much of a one-off on the 1Q and probably some in 2Q?
Yes. The increase in guidance from the original $10 million for 2011 to $12.5 to $13 million is directly associated with these transactions costs. The bulk of which probably will be incurred in the first half of the year. There will be some activity that naturally carries over into the second half depending on the transaction closing and whether they -- or making an assumption that there will be some ongoing expenses that we would incur, but the bulk of it will be incurred in the first half.
And of course, everyone appreciates the fact that given that we did not employ the services of an investment bank in connection with generating this transaction, we've saved our shareholders a lot of money there.
George Zavoico - McNicoll, Lewis & Vlak LLC
And finally, any comments on your next IND coming up? Can you say anything about that?
At this point our focus is really on amuvatinib and SGI-110 and advancing them in the clinic, and also considering the portfolio that we'll be working with following the closing of the transaction. We're going to be reviewing everything in the tent at that point in time and we'll have a lot more to say about that. Both companies, separately, have been working on a variety of interesting targets and have generated early-stage molecules that have potential, but we've not made a definite decision on that. Mike, would you have any comments on that?
I think we did give some guidance in that area during our analyst day earlier this month, so that's the guidance that we're using. So you could probably maybe just review those slides. In general, though, what we're seeing is, of course advancement of our PIM program. We've learned a lot about PIM. And we're deploying our knowledge in that area right now. So that's all progressing. We've also talked about our actual [indiscernible] program and that's running almost neck-and-neck right now with the PIM program. So those are likely to be one or both of those combined mechanics in the near future.
And if there are no further questions, I'd like to thank everyone for dialing in this afternoon and, of course, encourage you to come to us with any questions you may have. We're always happy to entertain those. And thank you very much, operator.
This concludes today's SuperGen's Q1 2011 Earnings Conference Call. You may now disconnect.
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