Encysive Pharmaceuticals Q3 2007 Earnings Call Transcript

Encysive Pharmaceuticals Inc.(ENCY) Q3 2007 Earnings Call November 2, 2007 8:00 AM ET

Executives

Ann Tanabe - VP of CorporateCommunications and IR

George Cole - President and CEO

Rich Goeggel - VP of Finance

Richard Dixon - Chief ScientificOfficer

Analysts

Matt Duffy - BDR Research

Matt Kaplan - Punk Ziegel &Company

Graig Suvannavejh - UBS

Chad Hellmann - Cat Trail Capital

Leon Zaltzman - Lehman Brothers

Operator

Good morning, ladies andgentlemen, welcome to the Encysive Pharmaceuticals Conference Call hosted byGeorge Cole, President and CEO. My name is Marla and I will be your conferencecoordinator. Initially, all participants will be in a listen-only mode with aquestion-and-answer session to follow at the end of the presentation. (OperatorInstructions).

As a reminder, this call is beingrecorded. I would now like to introduce Ann Tanabe, Vice President of CorporateCommunications and Investor Relations for Encysive Pharmaceuticals.

Ann Tanabe

Thank you. Good afternoon and welcometo Encysive Pharmaceuticals' conference call to discuss the financial resultsand highlights from the third quarter ending September 30, 2007. Following thepresentation, Mr. Cole will address any questions you may have.

I would like to remind you thatduring this call, we will make projections and other forward-looking statementswhich are only predictions and involve risks and uncertainties that could causethe company's actual results to differ materially from those projected. Pleaserefer to Encysive Pharmaceuticals' most recent report on Form 10-K and 10-Q asfiled with the Securities and Exchange Commission for additional information onrisk factors which could cause actual results or performance to differmaterially. These filings are available for your review on our website atwww.encysive.com. All projections and forward-looking statements represent ourjudgment as of today and we disclaim any intent or obligation to update orrevise such forward-looking statements.

At this time, I'll now turn thecall over to George Cole, Encysive's President and Chief Executive Officer.George?

George Cole

Thanks, Ann. Good afternoon andwelcome to the Encysive Pharmaceuticals third quarter conference call. To beginwe'll have Rich Goeggel, Vice President of Finance provide a top-line summaryof the financials from today's press release. Following Rich's comments, Dr.Richard Dixon, our Chief Scientific Officer will provide an overview of ourclinical development programs and then I'll discuss other achievements for thequarter, including our progress, commercializing Thelin in Europe and Canada.Rich?

Rich Goeggel

Thank you, George. Revenues inthe third quarter of 2007 were $8.8 million, compared to $6.3 million in thethird quarter of 2006.This increase in revenue was due to higher Thelin salesin Europe. European sales of Thelin wereapproximately $3.6 million for the third quarter and primarily from Germany and the UK.

Royalty income on sales ofArgatroban was $4.8 million compared to $6 million in quarter three of 2006.Under our agreement with GlaxoSmithKline royalties were under a tieredstructure and our catch-up payment, in addition to the royalty payments, isearned when sales exceed a certain threshold. In 2007, we earned the catch-uppayment in the second quarter. On 2006, we did not earn that payment until thethird quarter.

Research and development expenseswere $7.4 million in the third quarter compared to $16.3 million for thecorresponding quarter in 2006. A significant portion of the expense reductionis due to the phasing out of STRIDE-3 in the USand Latin America, a reduction in the numberof ongoing regulatory submissions, and reductions in staff due to the June 2007reorganization.

General and administrativeexpenses were comparable at $5.6 million in the third quarter of 2007 and $5.3million in the third quarter of 2006. While third quarter 2007 US general andadministrative expenses had declined compared to the prior year, our EU Generaland administrative expenses have increased. This increase is due to the openingof new European offices and hiring additional personnel. We believe that ourEuropean infrastructure is substantially complete and expect ongoing generaland administrative expenses to remain comparable to the third quarter of 2007.

For the third quarter of 2007,the company reported a net loss of $22.5 million or $0.32 per basic and dilutedshare, compared to a net loss of $25.5 million or $0.44 per basic and dilutedshare for the third quarter of 2006. The loss reflected our continuedcommercialization of Thelin in EU and restructuring charges of approximately$5.4 million related to retention agreements with employees entered into aspart of the June 2007 reorganization. The company expects additionalrestructuring charges of approximately $1.2 million in the fourth quarter of2007 as a result of these retention agreements.

The 2007 third quarter loss alsoincludes a non-cash charge of approximately $3.2 million in deferred debt issuecost related to the original Argatroban notes, which were redeemed in arefinancing, which I will discuss in a moment.

During the third quarter of 2007,the company completed two financings. In September, the company announced thatits special purpose of subsidiary, Argatroban Royalty Sub LLC, which I willcall Royalty Sub, refinanced the original Argatroban notes sold toinstitutional investors in February 2007.

In the refinancing, Royalty Subissued $68 million principal amount of new Argatroban notes and exchanged withthe original Argatroban notes and approximately $14.4 million in cash,resulting in net proceeds to the company of approximately $11.2 million. Thenew Argatroban notes are secured by royalties from sales of Argatroban, and bya pledge by Encysive of the stock of Royalty Sub.

In August, the company enteredinto new definitive agreements with institutional accredited investors topurchase approximately 7.7 million shares of the company's common stock in aregistered direct offering and warrants to purchase approximately 7.7 millionof common stock, resulting in net proceeds of approximately $14 million afterfees and expenses.

Ongoing operating expenses,excluding the restructuring charge, were $20.6 million in the third quarter,which was in line with company guidance and the company expects a similarexpense in the fourth quarter of 2007.

Finally the company's cash, cashequivalents and short-term investments at September 30, 2007 were $54.2 millioncompared to $43.8 million at December 31, 2006. Dr. Richard Dixon will nowprovide an overview of our clinical development programs. Dr. Dixon?

Richard Dixon

Thank you Rich. As many of youare aware, on August 6th the company filed a request for formal disputeresolution with the FDA to contest the third approvable letter we received for Thelin.On September 5th the company received a written response from the FDA that thedata in the NDA did not provide the substantial evidence of effectivenessneeded for approval. While additional appeals are possible, the company hasdecided not to pursue these and instead plans to conduct an additional PhaseIII study evaluating adding Thelin and PAH.

We have been asked by many of youwhat a Phase III study might look like. Our initial thoughts are that thiswould be a placebo control trial and approximately 200 patients would beapproximately 12 weeks in duration with 6-minute walk as the primary endpointand the trial will be conducted in both the U.S. and ex-U.S. where Thelin isnot commercially available. After we conclude our protocol discussions with theFDA, we will announce more details of the study and the potential timings ofthe program.

In parallel with these efforts,the company continues to explore the use of Thelin and TBC3711, in additionalindications. On September 4th we announced that enrollment was completed forthe Phase II trial of Thelin in patients with diastolic heart failure or DHF.Thelin is being tested on approximately 150 DHF patients at about 40 studycenters and the results of this trial are expected around the mid year 2008.

We also continue to enrollpatients in our Phase II trial with TBC3711 in resistant hypertension. Weexpect to provide more guidance on the timing of events with regard to thisprogram in the coming months.

In this quarter, we also maintaineda active meeting schedule in Europe, Encysive was present at the EuropeanRespiratory Society conference held in Stockholmand European Society of Cardiology meeting held in Vienna.

We also presented a long-termdata Thelin at the CHEST meeting last week. This data was from a study ofseveral Canadian centers reporting that up to 96% of PAH patients remainedalive after two years of treatment with Thelin. Looking forward we will also bemaking a presentation at the American Heart Association meeting next week.

This concludes the overview ofour clinical program. And I would like to turn the call now back to George.

George Cole

Thanks, Richard. We're makingwhat I believe is excellent progress in bringing Thelin to more physicians andpatients in Europe. In the quarter, weannounced a commercial availability of Thelin for PAH in Spain and France and September and Octoberrespectively. We've now achieved reimbursement and launched in four of the bigfive EU countries and expect to launch in the fifth Italy by the years end.

We believe these big five, plus anumber of smaller countries now selling Thelin positioned the company forsignificant sales growth in 2008. As many of you know, we've gained approvalfor Thelin in Canadaand have begun a limited launch of the product there on patient-by-patientbasis. Thelin is currently being reimbursed by private insurance and we'veapplied for reimbursement through Canada's national Common DrugReview. We expect this process to continue into next year.

In the third quarter, wecompleted a significant reorganization of the company in order to better managethe challenges ahead and we’re continuing to take the appropriate steps to bestleverage our assets. In July the company retained the services of Morgan Stanleyto assist in evaluating its strategic alternatives to maximize shareholdervalue.

While I know many of you areeager to know how things are progressing, we don't expect to publicly discloseanything more until the definitive transaction is entered into or the processis completed.

In summary, we are please withthe progress made to date in selling Thelin in Europeand reorganizing the company to better reflect the opportunities and challengesahead and in leveraging our expertise in developing endothelin antagonist for awide variety of diseases. Our European organization has successfully executedon our launch plans in the EU and we are grateful for all of their efforts.

Our U.S. work force has pulled togetherunder difficult circumstances and we appreciate their continued dedication tothe company. You can expect to hear from us in the relative near term as wefinalize plans for Thelin in the U.S., continue to grow sales in theE.U. and advance our pipeline.

I would now like to open up thecall for question at this time. Operator?

Question-and-Answer Session

Operator

Thanks you. (OperatorInstructions). And our first question will come from the line of Matt Duffywith BDR Research. Please go ahead.

Matt Duffy - BDR Research

Good morning and thank you fortaking my question. On the Phase III trial that you are contemplating, do youhave a sense of the skew between U.S. and ex-U.S. centers and isthere are way to control some of the variability we've seen within US in someof these Phase III trials.

George Cole

Thanks for the question. We, atthis point, don’t know what the SKU would be between the US and ex-US, but wehave some preliminary discussions with the steering committee and advisoryboard members and with a number of investigator sites who have been in ours andtrials in the past.

And we think there will be a fairnumber of sites, both in the USand in Europe and then Latin and South America,but we will participate in the trial. But to this point, we really can't giveany guidance around what percentage would be US versus ex-US. But I think weare going to try to take as much control as possible and trying to decrease thevariability in learning from how we've conducted trials in the past.

Matt Duffy - BDR research

Very good. And can you just talkus through a little bit on the diastolic heart failure program? Would the -- ifthere was statistical power in there, and then also what the pass score it isfor the positive result?

George Cole

I think it is a small trial, ashort trial in a disease that is chronic where ultimately, I think, one wouldhave to do some sort of morbidity, mortality, combined endpoint type trial andlong-term outcomes, but we haven’t certainly approached the FDA with any sortof clear path or what a Phase III design would look like.

But in sort of the classiccongestive heart failure, Phase III trials for systolic heart failure, that’scertainly what's been required. The trial currently is six months of treatmenton stable doses of drug. There is a run-in phase. It's an up-titration phaseand then looking at exercise improvements and some other endpoints at the endof the six-month treatment period.

And it is, as I said, 150patients, and so it is still a fairly small pilot study. So I think what wewould be looking for is we would like to see a statistical significance. But Ithink even strong trends in the right directions, the right -- all the rightendpoints, I think would be a positive signal to move into some next clinicaltrials. But we'll see in the spring or second quarter or some time mid-nextyear.

Matt Duffy - BDR research

Okay. And then with positiveresults, how do you envision? Is there an additional Phase II that would beneeded or can you just try to Phase III or is that under discussion?

George Cole

I think that's still underdiscussion. I would think that if we had extremely robust results, we couldmove into a pivotal trial if we see that we need to do some tweaking or look atsome different aspects of the trial design, it might lead to additional thingsto trial. But it's really too early to predict at this point.

Matt Duffy - BDR research

All right. Thanks very much.

Operator

And our next question will comefrom the line of Matt Kaplan of Punk Ziegel & Company. Your line is open.

Matt Kaplan - Punk Ziegel & Company

Hi. Good morning.

George Cole

Good morning.

Matt Kaplan - Punk Ziegel & Company

A question for Richard, stowingup Matt's question. With respect to the Phase III trial that you arecontemplating for Thelin in the USand ex-US, what do you think the timing of that trial would look lie in termsof enrollment? How long enrollment would take to complete the study once youget it going?

Richard Dixon

I don't think we've turned theguidance around that yet, but it's -- as I said, we are looking -- our initialthoughts was a couple of hundred patients. We know that, say, the STRIDE-2 trial took about 14 months toenroll. With a similar type trial, I would expect today it might take a littlebit longer. But I don't believe we've given any more real guidance around that,Matt, yet.

Matt Kaplan - Punk Ziegel& Company

Okay. And then, 3711 in terms of the Phase II resistanthypertension, how is enrollment going in that study and when could we possiblysee some data?

Richard Dixon

Yes. I think we've guided tosometime in 2008, and I think that's still all right at the moment.

Matt Kaplan - Punk Ziegel & Company

And remind us what the size ofthat study is.

Richard Dixon

It's about 150 patients. It’s afive-arm study, placebo versus proactive arms of drug and scattered out forthree months back to treatment.

Matt Kaplan - Punk Ziegel & Company

Great. Thank you.

George Cole

Sure.

Operator

Your next question will come fromthe line of Graig Suvannavejh with UBS. Please go ahead. Mr. Suvannavejh, yourline is open.

Graig Suvannavejh - UBS

Sorry about that. Good morning,and thank you for taking my questions. Most of my questions have been answered,but just a few small ones. I know that Thelin 3711 will probably take up most ofthe focus of your R&D. Anything else on the earlier pipeline front in termsof preclinical assets or any news you are expecting on the programs that you'vepartnered with Schering-Plough.

George Cole

At this point, Schering-Plough isstill pursuing the alpha-4-beta-1 compound, TBC4746. And at this point, I don’tthink there is any update to provide around that. And as far as the CCR9antagonist program, we still continue to pursue that to try to get into Phase Istudy, human studies next year.

And we have the other program,which we haven’t disclosed, which is also moving ahead, but I would say at alittle bit staggered pace. But we still can move that through into next year aswell.

Graig Suvannavejh - UBS

Okay. Great. And just a questionaround the additional Phase III trial for Thelin that you guys still need todiscuss with FDA or finalize discussions. Clearly, a lot of it depends on whathappens on the outcome of your strategic, your view of strategic options. Buthow do you guys think about paying for that Phase III trial or what's thethought on this right now?

George Cole

Yeah. I think as you said a lotwill be driven by what comes out of this process. But I think if you look atour budgeting process, it would be a matter of trying to move things around,and obviously this trial would go up as far as an R&D expense. So, whilethe R&D budgets that we are planning probably won't change appreciably, butgetting this Thelin trial will become a key for us. So, I think it's a matterof just prioritizing things.

Graig Suvannavejh - UBS

Can I just follow-up? If nothingcomes out of your review of strategic options and there is no specifictransaction that comes out of it. Are you still committing towards funding thePhase III on your own?

George Cole

I don't really know the answer tothat. I think we would have to sit at the end of this process and discuss thatand decide how to go forward.

Graig Suvannavejh - UBS

Fair enough. Thank you.

George Cole

Thank you.

Operator

And our final question will comefrom the line of Chad Hellmann with Cat Trail Capital. Please go ahead.

Chad Hellmann - Cat Trail Capital

Hi guys. Thanks for taking thecall.

George Cole

Hi Chad.

Chad Hellmann - Cat Trail Capital

How are you guys doing?

George Cole

Good.

Chad Hellmann - Cat Trail Capital

Good. Real quick. Can you give usany visibility, now you have been in the UKand Germanyfor better part of the year? The uptick you are seeing, is it mostly comingfrom the failures, is it from new patients, I think you guys will have someexperience now with how that's looking?

George Cole

Sure. As we kind of expected andwe heard from the market research that we did, the physicians are primarilytrying Thelin on patients that have either failed on Tracleer are naivepatients. So, when you think about the patients that are available to us, it isthose two groups. And when you think about the two major markets that we arein, we have done some very rough calculations and believe me they are rough,because there's not a lot of good data that's available. We think when you lookat those two populations, the failures and the naive patients that we areprobably getting somewhere in the 25% to 30% market share of those two groupsof patients.

Chad Hellmann - Cat Trail Capital

Okay. And any visibility based onthose percentages now that you have in Spainand Italyjust coming online now, projections moving forward. I know in the past you havebeen reluctant in doing because of the limited experience in those markets, butat any point you guys could see being able to at least provide some visibilityon how its going over there?

George Cole

No. We are not ready to do that.I think there are a lot of things that are impacting that discussion. One ofcourse is Ambersentan and we know it's going to be probably launched in Europe next year and what's the timing of that and what'sthe effect? So, we don’t feel comfortable in giving numbers at this point asfar as what Europe is going to be doing in2008.

Chad Hellmann - Cat Trail Capital

Okay, all right. Thanks a lotguys.

George Cole

Thanks.

Operator

And Mr. Cole, we do have onefinal question that will come from the line of Leon Zaltzman with LehmanBrothers. Please go ahead.

Leon Zaltzman - Lehman Brothers

Hi. Just trying to get a sense ofthe Thelin European ramp here, so, when we look at the most recent number, weshould think of this revenue stream just coming basically from the UK and Germany, right? Because the Spanishand the French launches took place at the very end of the quarter?

George Cole

Correct.

Leon Zaltzman - Lehman Brothers

And what about Canada and Ireland, can you give us a littlebit more granularity as to where the bulk of these revenues are coming from?

George Cole

Yeah. You are correct. The bulkof the revenues are coming from UKand Germany.We've also launched in the Netherlandsand Ireland, so there weresome sales in there from those markets but as you are probably aware thosemarkets are relatively small compared to UKand Germany.So, the majority of the sales were coming from those two markets.

Leon Zaltzman - Lehman Brothers

So, going forward for nextquarter, we should expect Italy,may be Italy, France and Spain to kick-in?

George Cole

Well, we said that Italywill be kicking-in in the fourth quarter. So, we haven’t said exactly when, butyou probably won't see much effect out of Italy in the fourth quarter. But weshould see some effect from Spainand from France.

Leon Zaltzman - Lehman Brothers

Okay. Great, thank you very much.

George Cole

Thank you. Well, I think that’sit and I would like to thank everybody for joining us this morning. Weappreciate your continued support and patience and we look forward to providingyou updates of our continued commercial and clinical progress in the monthsahead.

Operator

And ladies and gentlemen, thisconference will be available for replay after 11:30 AM Eastern Time todayrunning through November 9, 2007 at midnight. You may access the AT&Tteleconference replay system at anytime by dialing 320-365-3844 and enteringthe access code 891290, that number again 320-365-3844 and entering the accesscode 891290. That does conclude our conference call for today. Thank you foryour participation and for using the AT&T executive teleconference service.You may now disconnect.

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