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Flamel Technologies S.A (NASDAQ:FLML)

Q3 2011 Earnings Call

November 3, 2011 08:30 am ET


Stephen Willard - CEO, CFO and General Counsel

Siân Crouzet - Principal Financial Officer


Matt Kaplan - Ladenburg Thalmann

Peter Butler - Glen Hill Investment Research

Michael Schechter - Mentor Partners


Good morning, ladies and gentlemen, and welcome to Flamel Technologies announces third quarter 2011 results conference call. After prepared remarks, we will be opening the call to a Q&A period. (Operator Instructions) As a reminder, this call is being recorded. And it is now my pleasure to turn the call over to Mr. Stephen Willard, CEO. Please go ahead Mr. Willard.

Stephen Willard

Thank you very much and welcome to Flamel Technologies third quarter 2011 financial results conference call. We are pleased with the progress we made during this past quarter with both our existing partnerships and on the new business development fund. A major element of our third quarter profitability was the new supply agreement with GlaxoSmithKline for Coreg CR.

The previous supply agreement as many of you know expired at the end of last year. GSK and Flamel have been engaged in extensive negotiations for the new supply agreement in the period since then. You will recall that last quarter I informed our investors that I expected that we would bring this matter to a successful conclusion before the third quarter call and I am pleased that we were able to fulfill this goal.

I will discuss the new supply agreement following Siân’s presentation of our financial results. We’ve also enjoyed continued progress in the signature of new agreements for our core technologies. Since our last conference call, we have completed two new Medusa feasibility agreements. One, for a controlled release ocular project and a second which is for the delivery of metabolic peptides.

The latter agreement is the second one that we’ve included with the current partner which is one of the top 10 biopharmaceutical companies in the world. We also announced that we’ve entered into a license agreement for the development of a Medusa enabled formulation of tigecycline, an antibiotic that is currently administered via intravenous infusion.

We believe that the Medusa platform [supplicability] to small molecule drugs and it’s ability potentially to take IV administered drugs and formulate these molecules for subcutaneous use are important advantages that may create significant further opportunities for us. We believe that this project could move rapidly to the clinic. I would now ask Siân Crouzet, our principal financial officer to discuss our third quarter results. Siân

Siân Crouzet

Good morning. As Steve just mentioned, our profitable third quarter results were driven by the successful conclusions and negotiation for a new supply agreement with GSK. We reported a profit of $1.7 million for the quarter of $0.07 per share. This is compared to a net loss of $3.3 million or $0.14 per share in third quarter of 2010. We believe that the negotiations with GSK was fruitful and well worth the effort and are pleased to share these results to shareholders.

Total revenues during the third quarter were $10.4 million compared with $8 million in the year-ago quarter. The new supply agreement is effective as of January 1 and it governs pricing for alls materials minus the GSK since the beginning of this year. The additional revenues from the first half of this year that were recognized in the third quarter on confirmation of the agreement amounted to $1.6 million. In addition to the full effects of the new supply agreement, product sales and services benefited from increase demand for Coreg CR microparticles compared to prior year.

The reduction in our license and research revenues year-on-year is a result of two elements. Firstly, the increase of projects in clinical development which requires less involvement from our R&D team during this phase and secondly a number of feasibility agreements that we have conducted at the last 12 to 24 months, are now either being evaluated by our partners increasing pre-clinical trials executed by our partners.

We continue to pursue discussions with partners for the continued development of a certain number this quarter. In terms of costs and expenses, they continue to decline in the third quarter from $11.2 million last year to $9.2 million this year. This decline is in part due to timing year-over-year of our internal clinical and pre-clinical program.

This equally reflects of our commitment to align our cost to our revenue stream. We have thought to limit recruitment, identify opportunities for cost reductions and limit discretionary spend over the past 12 months.

This quarter also demonstrates our capacity to manage our cost structure within our ongoing revenue stream and that benefit from events, such as the conclusion of the year-supply agreement with GSK, generating additional revenue.

We thus finished the quarter with $29.5 million of cash and marketable securities compared to $32.1 million a year ago.

I’ll now turn the call back over to Steve.

Stephen Willard

Thank you, Siân. We are pleased with our third quarter financial results. We benefitted from the new supply agreement which will further strengthen our balance sheet and our results going forward. The new agreements with GSK allows us to receive significantly greater margins on Coreg CR microparticles shift to GSK then previously as well as establishes guarantee monthly minimum.

This makes our planning process much smoother and give this multi-year term I believe it indicates this Coreg CR will continue to be an important product for Flamel for years to come. The further significance to the agreement is that Flamel will benefit from various substantial revenues for a company of our size separately and distinctly from our Royalty revenues. In fact, we expect with our supply revenues for Coreg CR this year and the potential next year, will be greater than the separate royalty income we received from the products.

While resolution of our relationship with GSK has been the most important development of the quarter, we have actively continued our work on our existing products, projects really, and have signed two new feasibility studies as well as a new license and development agreement. This new licensing agreement with Eagle Pharmaceuticals is important, I believe. And this highlights, the application of Medusa to seek to create subcutaneous controlled release formulations of small molecules out.

As a result, our goal is to take molecules which are currently dosed to intravenous infusion and convert them to drugs which can be given by injection under the skin. The infusion process is a time consuming and costly one, which often involve the patients receiving therapy for up to a few hours in the doctor’s office or other medical facility.

If these drugs can be used by simple injection, it will save patients a great deal of time, reduce the cost there and free up needed medical resources for other patients. We’re in discussions for applying our technology to a significant number of additional molecules which can similarly benefit if our technology can permit subcutaneous injection. This application is important as we are focused for many years not on simple improved compliance and convenience; but rather on formulations that are substantially superior for patients and their insurance companies.

I believe that the only products that will be successful are ones that have compelling therapeutic and economic advantages for the reduction of healthcare costs. This initiative to take products from IV to conventional injection is fully consistent with the scope.

As many of you know, we have been working with Baxter since 2009 to create long acting formulation of certain growth factors that are currently administered via intravenous injection. Our partnership with Baxter has been discontinued. We will continue to pursue opportunities to work on long acting IV molecules including those we have been working on with Baxter.

But, as our agreement with Eagle demonstrates, we believe that an equal or greater opportunity is to formulate molecules wherever possible for subcutaneous administrations.

With regard to our ongoing Alpha Interferon study, initial results of the Phase II study are the subject of an abstract that has been published ahead of the annual meeting of the American Association for the Study of Liver Disease. These results are being presented at their meeting in San Francisco. Our presentation is expected to be on November 7th.

The trial is being conducted by the ANRS, a prestigious French agency tasked with investigating oncology and biology. According to the abstract, interim data demonstrated a statically significant reduction in serious adverse events in patients receiving our Alpha Interferon XL versus those who received the standard dose of PEG-Intron, a PEGylated formulation of Interferon Alpha manufactured by Merck. Full data is expected to be available early next year.

In the interim data published in the abstract, appears consistence with the anti-viral activity we saw in the one and two week studies we conducted previously. For reference, our initially study demonstrated a statistically significant reduction in viral load in those genotype I patients receiving Interferon Alpha XL versus the genotype I patients who received PEG-Intron, as well as the remarkably reduced side effect profile we are currently seeing in our Phase II studies.

We believe that there are substantial opportunities for our improved Interferon Alpha particularly in those areas of the world that are more severely affected by hepatitis. Those would be in C strains of the disease. The largest population of hepatitis patients in the world is in China. Estimates are that there are approximately 30 million hepatitis C patients in China and four-times that number have suffered from hepatitis C. Interferon, is administrated to treat both diseases there. But for budgetary reasons PEGylated Interferon has very low market share; it’s simply too expensive for the Chinese market.

Nevertheless the economic and societal cost of hepatitis are devastating not just in China but in much of Asia. We believe if there is a substantial opportunity for the company to address this large unmet medical need with our Interferon Alpha XL.

The Alpha Medusa platform does not involve protein engineering as with our competitors and because of bioactivity of the molecules maintain, Medusa is a very cost effective solution. And of course if the overall cure rate is improved due to greater efficacy and the reductions of treatment limiting serious side effects, our formulation could be the most cost-effective solution overall.

One consistent advantage Flamel has seen in clinical trials in a large number of patients over a wide variety of molecules is remarkable reduction in side effects versus these molecules or PEGylated molecules. This allows us to be potentially a preferred partner for the improvement of biosimilars, which we call Biobetters, as they are better products for improved treatments, presently advantages our technology provides.

Many large pharmaceutical companies as well as generic companies are beginning to develop biosimilar strategies and we believe we are well positioned to partner in this field all over the world.

So in summary, I would like to highlight where Flamel stands today. Financially, we are very sound. We have $30 million in cash with very little consumption of cash and the expectation to increase our cash. We have no debt. We have new supply agreements which we will continue at established levels even if generics are approved.

We have royalty payments in Coreg CR. We have more than $150 million in net operating losses, which will shield our profits going forward. I believe that the value of these items exceeds our current market capitalization and that is without including the value of all our other partnerships and the value of our technology.

The opportunities presented by our technologies are manifest. With Medusa we have the potential to substantially reduce side effects for many currently marketed drugs and many of the drugs yet to come. We have data that suggests that Medusa formulations may provide superiority in treatment efficacy as well.

Furthermore we have the potential to formulate drugs for delivery by subcutaneous injections rather than by intravenous infusion, we can solubilize clearly for insoluble drugs. We can prevent aggregation of proteins and other molecules which allows for better treatment and deliver multiple therapies on the same strand of polymer.

On the micropump side, we have three agreements to date with our Trigger Lock abuse-resistant technology and I expect more in the months to come. We have been selected to formulate other strong molecules as micropump that have been unsuccessful with other drug delivery technologies and so we believe we can have success where others have failed.

We have one of, if not the only liquid formulation which seems to have wide applicability to drugs that are dosed more than once a day for application both with children and the elderly. Pharmaceutical development and approval is not a fast process. We have chosen to be a partnership company rather than extending our own capital to take our own formulations to market.

This makes us subject to the decisions and commercial strategies of our partners, but we continue to prove our technology and expand our relationships at a strong rate. I believe we have built a strong basis for the future growth of your company. And with that I would now be pleased to take your questions.

Question-and-Answer Session


Thank you, sir. (Operator Instructions). Our first question comes from Matt Kaplan with Ladenburg Thalmann. Please go ahead.

Matt Kaplan - Ladenburg Thalmann

With respect to the supply agreement, can you give us a little bit more color on that, can you help us understand maybe from a modeling point of view, a perspective how this compares with the previous supply agreement in terms of the impact on the total revenues that you can receive from Coreg CR?

Stephen Willard

And first of all, it is substantially better in terms of margins. It is a multiple of our prior margins. I will give you and as I mentioned in my comment it allows us to get a very substantial sum of money we believe each year that is in excess of the amount that we've been receiving as royalty income. Obviously that was not the case in past years.

For example, this year to be specific, we’re forecasting about $8.5 million of royalty revenue and our product sales we expect $13.6 million. So that’s $22 million this year in aggregate from the product and as you can see from that it is essentially larger number with regard to the supply portion of the money we received from GSK and in prior years.

I think it’s also significant that it’s a multi-year deal with commitments and I think not only does that give us greater certainty of our revenues overtime, but also I believe that the fact that GSK wanted to work out a multi-year agreement with minimums gives me personally more confidence that they agree that we will be able to successfully defend and enjoy the benefits of Coreg CR in the years to come.

Matt Kaplan - Ladenburg Thalmann

Now (inaudible) in terms you’re going to give me a product sales number, could we expect those to increase and also obviously include your improved margins there?

Stephen Willard

I think the margins are agreed and we will enjoy the enhanced margins for the rest of the agreement. In terms of the supply demand, that’s going to depend on whether we continue to avoid generic competition and also what they do from a marketing perspective. But it is important to me that this supply agreement continues even if and when a generic is whenever approved.

Matt Kaplan - Ladenburg Thalmann

A couple more questions. You mentioned during your prepared remarks the Baxter decided to discontinue, can you give us any color in terms of how they reached that decision and why?

Stephen Willard

Sure, our technology worked very nicely, but this is was a situation where they are taking a different approach to blood factors that doesn’t include our technology. So while we regret that we won’t be going forward with Baxter I think these are technologies and molecules that will have interest to others and our technology works very well, I believe intravenously, although we will also as I said in my earlier remarks be moving aggressively to encourage partners to use our technology to take intravenous drugs and use our technology to try to make them capable of subcutaneous injections.

Matt Kaplan - Ladenburg Thalmann

And then kind of keeping on with the Medusa pipeline, can you give us an update in terms of a status of your Merck Serono agreement and the beta Interferon.

Stephen Willard

Sure. That appears to be going very well. It’s still in the clinic. Merck Sereno will have the right to decide when it is able to talk about it and their decision with regard to the next step in clinical trials, but the indications we have so far are that it’s progressing nicely and it’s ongoing.

Matt Kaplan - Ladenburg Thalmann

Will the next step be potentially moving into Phase III or what’s your thought?

Stephen Willard

I have my thoughts, but that’s for Merck Sereno to announce.

Matt Kaplan - Ladenburg Thalmann

And in your prepared remarks, you spoke about the interim data that’s going to be announced for alpha interferon at the upcoming conference. Do you think that interim data will be sufficient to launch partnership discussions?

Stephen Willard

All partnership discussions are already ongoing and interestingly and separately here in various portions of the world. We have been discovering that there is tremendous need for alpha Interferon and potentially other of our Biobetters all over the world and so no discussions in due intelligence and all that sort of things on alpha Interferon as well as others is already going on right now.

Matt Kaplan - Ladenburg Thalmann

Okay. And then one last question, with respect to your Trigger-Lock program, have they advanced into a clinic for any -- what status are they in, in terms of development?

Stephen Willard

We have three Trigger-Lock programs and so I expect to have more in the next couple of months. The first one is already in the clinic. It has been in the clinic and successfully so. The others are about to enter the clinic and the advantage of our Micropump technology is that we can move quite quickly. Also pain is relatively short clinical trial compared to some of the other drugs we use. So these trials have a tendency to move faster than with the therapeutic proteins and other things like that.


We will take our next question from Peter Butler with Glen Hill Investors.

Peter Butler - Glen Hill Investors

Good day. You mentioned the Biobetters program or venture several times, is this is a relatively new opportunity, I guess, that you’re discussing. You have a number of things developing in Asia, where do you expect the company to be in two years. So, we’re going to be ringing the cash register, where do you think we will be?

Stephen Willard

In Asia -- I think, the idea in my discussions over the past quarter, been surprised at the amount of interest of a variety of parties in going in to Asia. There is a major initiative among big pharmaceutical companies to try to diversify away from the US and Europe and tap these markets, because of our cost effective advantage, I think we are potentially the preferred partner to a lot of better treatments in Asia. I mean, one of the advantages we have is, we have a very cost effective process.

Our Medusa Polymer is not expensive. It’s a very simple mixing process added to therapeutic agents, and so for a price not much greater than the cost of the native agent, we can create a once-a-week formulation. So, for example, in China, with Interferon and Alpha, we’re told that it costs about $1,000 a year to treat a patient with three-times a week, which has side effect profile such that as many as in some studies 40% of people discontinued treatment because of its horrible side effects.

The PEGylated products $4,000, $5,000 $6,000 according to people we have spoken to. And so there is huge gap there with people not able to afford the much more expensive PEGylated products and the difficulties that PEGylation companies have in that if they send their product to China at a lower price it could be diverted back to other markets.

So we are finding that people are very excited about the possibility of producing our alpha Interferon at, let’s say consolidative price of $2000, that can be very comparable with the three-times a week with far fewer side effects, far better treatment and when you apply that to 30 million people with Hepatitis C and a 120 million or more with Hepatitis B, and a growing population for that one country alone, you can see the kind of value that our Biobetter formulations can produce.

And we are looking with a variety of different companies at tapping these markets. I just gave you the data with regard to Alpha Interferon, but it applies to many of the proteins and peptides that are used therapeutically. We have not found anything that Medusa is not capable of formulating, and so we are looking not just for Alpha Interferon, but potentially what I called a packaged deal with regard to multiple molecules and our Medusa formulation in various parts of the world.

It doesn't change our focus from the United States and Europe, but I think it could be a major dramatic new opportunity for our formulations in next year or two.

Peter Butler - Glen Hill Investors

Do you foresee that by the end of next year or the end of the year after that, you will have to convert some of these discussions into real business opportunities and may be enough opportunity to ring the cash register?

Stephen Willard

Well, I definitely do, I mean I think we clearly think have the likelihood of conforming into multi arrangements for these parts of the world. With regard to ringing the cash register, I think that certainly there would be payments -- upfront payments and payments for research and development. There may be investments in Medusa’s polymer plants in the region. I don’t think -- I think it’s going to take more than a year to two years potentially to get some of these drugs approved by the regulatory agencies.

Although we have found in our discussions that we’ve had a very positive response from the regulatory people that we’ve talked to because such a compelling health – public health benefit to our technology, I mean if people have hepatitis B and hepatitis C, and they can’t afford once a week PEGylated treatments and the 30% to 40% drop out rate was three times a week, we have a very compelling opportunity to offer them a much lower price solution to a very serious problem.

And so, we are finding that we have expressions that for public health reasons we may be able to have the assistance of governments in trying to get our products to market.

And if that were to be the case that would certainly lead to a better pathway for us to the royalty stream, but in terms of your phrase, certainly I see opportunities in the next year to enter into the partnerships which would result in potentially substantial revenues for Flamel.

Peter Butler - Glen Hill Investors

Okay. And another subject, looking at your Coreg joint venture with Glaxo, it appears from the outside at least that the relationship has changed overtime. Well now it looks like it has been superb with its technology and manufacturing capability you know establishing a much better Coreg in the market and you’ve also run with the ball defending its legal position against the generics and at the same time Glaxo has been sitting on its [butt] doing nothing as far as I can see and there are not contributing anything new; so that if you re-negotiated this agreement, you should be getting substantial benefits to reflect your contribution. So the question is net-net how much more does Flamel make each year on its new contract versus the old?

Stephen Willard

Okay. First of all, it’s not a joint venture. We’ve licensed our technology to them. Secondly, new agreement with them so that I will take exception on their behalf to be sitting on their [butt] comment; they are a fine company to partner with and I have laid out in response to Matt’s question, I mean if you compare the sales margins that we expect for this year, they are significant multiple of what we received in the past.

So I think that we have had a really good return on this one element which is solely the supply. You make bigger issues about what’s the future of Coreg CR and who is going to continue to defend it and those are things that we’re discussing separately with GSK. But those are different and yet very important in terms of the role Coreg CR will continue to play in the congestive heart failure space.


(Operator Instructions) And we’ll take our next question from Michael Schechter with Mentor Partners. Please go ahead sir.

Michael Schechter - Mentor Partners

Just one quick question, I noticed that Wall Street Journal has an article that your largest shareholder Oscar Schafer seems to be retiring and going out and liquidating his position. I was wondering if you have contacted and what your thoughts on this stock that could be available over the next couple of months?

Stephen Willard

I am in regular contact with all of our large shareholders. I don’t think you are accurate in saying that he is liquidating his position. In fact, what was in the Wall Street Journal is after 40 years he is passing on the torch to his partners, but he will be Chairman of the new fund. Mr. Schaffer has been a very long-term investor in Flamel Technologies and this is something that he will be, as I understand from the Wall Street Journal, doing over the next six months and there will be plenty of time to see if the new fund wants this position or if he wants to sell it to another new large shareholder. But I think this is something that is not an immediate issue by any means. It’s something that we can resolve carefully and to everyone’s advantage overtime.


(Operator Instructions) We have a follow up question from Peter Butler with Glen Hill [Investors]. Please go ahead, sir.

Peter Butler - Glen Hill Investment Research

Okay. Steve, could you do the math on your venture with Merck Serono? The industry rumors are obviously that you have a much better version of a $2.5 billion drug and that this should translate into above normal royalties to you or royalty rate. So for the sake of argument, if you got a 10% royalty rate on a $2.5 billion drug that looks like serious money and even if you have to discount it back several years to the approval date, it looks like just as Merck Serono venture is worth significantly more than your current market cap?

Stephen Willard

The Merck Serono, as far as I guess it’s about $2.2 billion a year at current levels obviously, if they were successful with us we would hope it might even take greater market share. But there is a lot of uncertainty as we go forward, but the amount and the result of success is pretty staggering, if it all works out to our advantage and that is true of a great number of our projects.

I mean the tigecycline product is small and has current sales of $324 million, but with a double digit royalty there if we have success in that market growth and we have only 25 million shares outstanding even on a $400 million project. The return to our investors given the fact that we have such a small share base, no debt, no convertible, success with $400 million drugs can be very significant and obviously success with $2.2 billion drug would be six or seven or eight times even more dramatic.

But again, we are a very diversified company. I went through in my remarks the wide variety of applications that we have, we already have a lot of partnerships that are in the clinic and moving forward and any one or two or three of them combined could on the market have a very significant positive impact for our shareholders.


And that does conclude today's question-and-answer session. I would like to turn the conference back over to our speakers for any additional or closing remarks.

Stephen Willard

Thank you very much. I think it’s been a very fruitful quarter. We are very pleased with resolving our situation with Glaxo. We are very pleased with the new business that we’ve done as well as the success of our existing program. We see tremendous new opportunities as we go forward as a company with the new applications of our science and I look forward to continuing to keep you all updated on the exciting developments at your company. Thank you much for your interest in Flamel Technologies and for your attendance on this conference call.


And that does conclude today’s teleconference. Thank you for your participation.

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