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Astex Pharmaceuticals (NASDAQ:ASTX)

Q1 2012 Earnings Call

April 30, 2012 4:30 pm ET

Executives

Timothy L. Enns - Senior Vice President of Investor Relations, Business Development & Corporate Communications

James S. J. Manuso - Chairman of the Board and Chief Executive Officer

Michael Molkentin - Chief Financial Officer, Principal Accounting Officer and Corporate Secretary

Mohammad Azab - Chief Medical Officer

Harren Jhoti - Founder, Chief Executive officer and Director

Martin Buckland - Chief Business Officer and Director

Analysts

Robin Davison - Edison Investment Research Limited

George B. Zavoico - McNicoll, Lewis & Vlak LLC, Research Division

Operator

Good day, ladies and gentlemen, and thank you for standing by here at Astex Pharmaceuticals First Quarter 2012 Earnings Conference Call. [Operator Instructions] As a reminder, today's conference is being recorded. And now, I'll turn the program over to Timothy Enns, Senior Vice President Corporate Communications and Marketing. Sir, the floor is yours.

Timothy L. Enns

Thank you, operator. Good day and thank you for joining us for Astex Pharmaceuticals 2012 First Quarter Financial Results Conference Call. With me today are Dr. James Manuso, Chairman and Chief Executive Officer; Dr. Harren Jhoti, President and member of the Board of Directors; Dr. Mohammad Azab, Chief Medical Officer; Dr. Martin Buckland, Chief Business Officer; and Michael Molkentin, Chief Financial Officer. In a few moments, Jim Manuso and Michael Molkentin will deliver remarks on the 2012 first quarter financial results and our business outlook for the year. After prepared comments, we will open the line for questions. Earlier today, we issued a press release with our financial results. A copy of the press release is available in the Investor Relations section of our website at www.astx.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 will make projections and forward-looking statements that are based on management's current expectations. Actual results may differ materially from these forecast and projections due to various factors. There are significant risks and uncertainties in biotechnology research and development. There can be no guarantee that our projects, products, 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 codevelop and patent disputes and litigations.

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. Our Astex annual stockholders meeting will occur on June 22. We invite you to look for your proxy materials in your email or postal mailbox in early May. I will now turn the call over to Dr. James Manuso, who will provide highlights of our accomplishments during the 2012 first quarter. Jim?

James S. J. Manuso

Thank you, Tim. Good afternoon, and thank you for joining us for Astex Pharmaceuticals 2012 First Quarter Conference Call. During the quarter, we made considerable operational progress on many fronts in discovery, research and in the clinical and regulatory development of our drugs. Our balance sheet remains sound and our financial performance was excellent. We ended the quarter with $126 million in cash and marketable securities and we posted net income of $4.2 million. Dacogen royalty revenue rose to $20.6 million in the first quarter, representing an increase of approximately 21% from the prior year. We're maintaining fiscal year 2012 royalty guidance of up to $67 million.

Last month, our Dacogen partner Eisai received a complete response letter from the U.S. FDA to respond to the application for approval of Dacogen in elderly acute myeloid leukemia or AML. The FDA declined to approve the application. While we're disappointed with the agency's decision, in the second half of this year, the European Medicines Agency, or EMA, will rule on Eisai's sublicensee Janssen-Cilag's Marketing Authorization Application, or MAA, for Dacogen in elderly AML. The FDA and EMA drug review and approval processes are not the same. Historically, there have been applications which one agency has approved and the other has not approved. It is important to note that there is currently no approved therapy for elderly AML patients in any jurisdiction worldwide. Clinical data from SGI-110, our second-generation hypomethylating agent, a follow-on drug to Dacogen, was presented earlier this month at an oral presentation at the American Association for Cancer Research or AACR Meeting. A joint media forum was also held with Stand Up To Cancer, the foundation that is providing funding for the Epigenetics Dream Team, the team that has been collaborating with Astex on scientific and clinical studies of SGI-110. The data presented at AACR confirmed a favorable pharmacokinetic profile of subcutaneous SGI-110. It has a half-life of the active decitabine levels that is up to 4x longer than what is achieved with Dacogen IV infusions. There was excellent hypomethylation in the daily treatment regimen and preliminary complete responses or CRs have been observed and relapsed in refractory AML patients. These responses were evident in those AML patients who achieved the greatest hypomethylation, demonstrating that greater degrees of hypomethylation induced by SGI-110 were correlated with disease response. This correlation is exactly what our clinical researchers sought. SGI-110 will soon begin the Phase II dose expansion stage of the trial in patients with MDS or AML. We expect to have a clinical data update from the ongoing SGI-110 study by December in time for the American Society of Hematology or ASH meeting. Our next stage of the SGI-110 program is to test the drug in solid tumors. We are on schedule to initiate this stage of SGI-110's clinical development in the third quarter of 2012. Our HSP90 inhibitor AT13387 in combination with amuvatinib is progressing in a Phase II trial in patients with tyrosine kinase inhibitor-resistant gastrointestinal stromal tumors or GIST tumors. Data from 2 Phase I trials of AT13387 will be presented at the American Society of Clinical Oncology or ASCO conference in June.

In the third quarter, we will expand the clinical program of AT13387 to explore its use in multiple solid tumors. Amuvatinib, or MP470, is continuing to accrue patients in an international Phase II clinical proof-of-concept trial in patients with small cell lung cancer. Preliminary results are expected in the fourth quarter. AT7519, our drug that inhibits multiple cyclin-dependent kinases, or CDKs, is in a Phase II trial in combination with bortezomib in patients with multiple myeloma. The National Cancer Institute of Canada's clinical trials group will initiate 2 new Phase II trials, one in patients with chronic lymphocytic leukemia or CLL and another in patients with mantle cell leukemia or MCL by mid-year.

Our kinase inhibitor, AT9283 has been found to inhibit the activity of oncogenes Aurora A and B and JAK2. Ongoing trials are in multiple myeloma and in pediatric tumors.

Our preclinical programs are productive. For example, at the recent European Association for the Study of the Liver or EASL meeting, Astex presented data on AT26893, a novel first-in-class direct-acting antiviral agent against the hepatitis C virus or HCV. AT26893 binds to a novel allosteric site on the full-length helicase protease complex of HCV. Compounds binding at this site have a novel mode of action and a different resistance profile compared to active site protease inhibitors. AT26893 is in preclinical development in preparation for an IND filing.

At this time, I will turn the call over to Michael Molkentin, our Chief Financial Officer. Michael will provide details on our 2012 first quarter financial results, as well as provide an update on fiscal guidance for 2012. Michael?

Michael Molkentin

Thank you very much, Jim. We are pleased with our first quarter operating performance. We were profitable and we continue to have a strong financial position. I would also like to remind the listeners on today's call that the acquisition of our U.K. discovery operation was completed during July 2011 and is, therefore, included in our 2012 first quarter operating and financial results but is not reflected in the same prior year quarterly period.

Total revenues for the 2012 first quarter were $22 million compared with $17.1 million for the same prior year period. Total revenues for the 2012 first quarter include royalty revenue of $20.6 million compared with $17 million for the same prior year quarterly period. Our royalty revenue is earned pursuant to our worldwide license agreement for Dacogen and is generally received -- recognized when received. Total revenues for the 2012 first quarter also include development and license revenue of $1.4 million compared with $127,000 for the same prior year period. The increase in development and license revenue for the 2012 first quarter is due to the accelerated recognition earlier in the quarter of all remaining deferred revenue resulting from the transfer to GSK of existing research work and assets generated under the former client collaboration. The transfer of this program arose from the review and rationalization of the company's internal pipeline and drug discovery programs as part of the prior year acquisition.

Total operating expenses for the 2012 first quarter were $20.6 million compared with $11.6 million for the same prior year period. The primary reasons for the increase in total operating expenses for the 2012 first quarter when compared with the same prior year quarterly period are the consolidation of research and development and general and administrative expenses related to the acquisition of Astex Therapeutics Limited, increasing research and development activities for our programs associated with SGI-110, AT13387 and amuvatinib and an expense for amortization of intangible assets. For the 2012 first quarter the noncash expense for amortization of intangible assets was $2.2 million. We had no similar expense for the same prior year period. While stock-based compensation expense, also a noncash charge, was $765,000 for the 2012 first quarter compared with $712,000 for the same prior year period.

The company reported net income for the 2012 first quarter of $4.2 million or $0.05 per basic and $0.04 per diluted share compared with net income of $5.5 million or $0.09 per basic and diluted share for the same prior year period. The net income for the 2012 first quarter included an income tax benefit of $2.8 million compared with an income tax provision of $44,000 for the same prior year period. The income tax benefit for the 2012 first quarter was primarily due to the recognition of the tax benefit associated with the amortization of deferred tax liabilities resulting from the acquisition and the utilization of a foreign research and development tax credit related to the U.K. subsidiary.

As previously indicated, the company continues to report a strong financial position. At March 31, 2012, we had approximately $126 million in unrestricted cash, cash equivalents and current and noncurrent marketable securities compared to approximately $128 million at December 31, 2011. The company's financial guidance for 2012 remained substantially unchanged from our previous guidance. We continue to anticipate royalty revenue will increase up to 10% from the prior year to a range from $64 million to $67 million. Development and license revenue remains at $1.4 million for 2012. Though we anticipate earning additional development and license revenue from our partner programs, we do not guide to such revenue due to the general uncertainty around and timing of milestone achievements and payments.

The last remaining payment of $700,000 relating to the sale of our commercial franchise during 2007 will be classified as a gain on sale of products and is expected to be received during our 2012 second quarter. Research and development expenses remain unchanged and are expected to increase from the prior year to a range from $62 million to $67 million. Amortization of intangible assets, a noncash charge, has been revised upward from a prior estimate of $7.6 million to $8.5 million for the year. General and administrative expenses remain unchanged and are expected to decrease from the prior year to a range from $14 million to $15 million.

Our estimated income tax benefit associated primarily with the amortization of deferred tax liabilities resulting from the acquisition and a foreign research and development tax credit related to the U.K. subsidiary has been revised upward from a prior guidance and is now anticipated to be in the range from $5 million to $6 million for 2012. The forecasted net loss for 2012 remains unchanged and is expected to be in a range from $13 million to $15 million for the year. In addition to the amortization of intangible assets included in total operating expenses are other recurring noncash operating charges such as stock-based compensation expense and depreciation that are estimated at $3.5 million for 2012. We continue to estimate that our average annual shares outstanding used for calculating per share results for 2012 will be approximately 93 million common shares.

This concludes the review of our financial results for the 2012 first quarter and comments on our updated annual financial guidance for 2012. I will now turn the call back to Dr. Manuso for closing remarks.

James S. J. Manuso

Thank you, Michael. Astex is a self-financed company with a strong balance sheet, a deep proprietary pipeline and multiple partnerships. In the first quarter, we achieved profitability and we made progress on key programs. 2012 promises to be a signal year for Astex. We await the upcoming European Medicines Authority decision on Janssen's Marketing Authorization Application on Dacogen and elderly AML expected in the second half of 2012. We are planning a number of clinical data presentations at ASCO, ASH and other scientific conferences.

During our fourth quarter, 4 of our Phase II clinical stage drugs will yield readouts. Operationally, we continue to expect to be at or near cash flow neutrality for 2012. For those of you who have not had the opportunity to access our Analyst Day presentation and accompanying PowerPoint, it is available on our website. This presentation will give you an in-depth perspective on our company's business and programs. We look forward to updating you in the months ahead and at our annual stockholders meeting. Dr. Harren Jhoti, Dr. Mohammed Azab, Dr. Martin Buckland, Michael Molkentin, Timothy Enns and I are now ready to answer your questions. Operator, we will take questions at this time.

Question-and-Answer Session

Operator

[Operator Instructions] Our first questioner in queue is from Robin Davison with Edison Investments.

Robin Davison - Edison Investment Research Limited

First of all, I just want to -- if you have any update from Janssen on the progress of the review of Dacogen in AML in the EU whether you -- whether it reached any of the sort of the trigger points along the way, the [indiscernible] questions that sort of thing?

James S. J. Manuso

No. Unfortunately, we don't have any update on that. I appreciate as you know in the EU, it's a matter of stopping the clock when questions are posed. There can be a continuing back-and-forth between the agency and the reporter. And in this case, we're estimating that within the third or fourth quarter, we should have a final answer. Mohammad, do you have any further comments on that?

Mohammad Azab

No, Jim. I think, as Jim said, we have updates, but at this point in time, I mean, Janssen had not disclosed any specific milestones in the progress of the application. And usually, it is not done. People do not disclose what is the different milestones. But they have been progressing the application well and they have been responding to questions. So we have every reason to believe that there will be a decision made soon and we expect it to be in the second half of the year.

Robin Davison - Edison Investment Research Limited

Right. Okay. Just a quick follow-up you mentioned 9283 and obviously, I'm aware that the plan has been to -- for that to go as part of the proposed Montigen spin-off and I'm just wondering whether the -- anything has changed there. You haven't sort of elaborated more.

James S. J. Manuso

Yes. Up until such time as Montigen is a fully financed freestanding company, it continues to be an asset of Astex Pharmaceuticals so we want to position it properly and legally in that regard.

Robin Davison - Edison Investment Research Limited

Okay, right. I just got a final quick one for Michael, actually. Obviously on the balance sheet, there's a reduction in the deferred acquisition consideration in the sort of current liabilities, it's about $7 million and in the noncurrent, I think, 2.5. I'm aware that was carried only some of it was carried, I think, NPV there. I'm just wondering if you can sort of elaborate a little bit on the amount that's actually been paid out, what's been triggered by milestones that have been achieved in the acquisition agreement?

Michael Molkentin

Yes. Not a problem. I'd be glad to. When you look at our balance sheet, the deferred acquisition consideration consists of both a current and a long-term portion and our current portion as of March 31 is about $10 million and the long-term portion is approximately $9 million. So from an NPV perspective of the $30 million or the remaining amount of that $30 million is about $19 million that we will pay. Now during February of the first quarter, we did make the first payment on that obligation slightly in excess of $10 million and that was paid in February and it was paid in cash. So we started out at $30 million. We did an NPV on that which we adjust every quarter based on anticipated or forecasted payment stream. And then -- and so after the $10 million payment at the end of March of this year, that net present value obligation is about $19 million.

Robin Davison - Edison Investment Research Limited

Right. I'm guessing you're not in a position to speculate on those, speculate is the wrong word, but on whether the rest of the remaining $30 million -- the amount remaining will be paid on the progress?

Michael Molkentin

Well, the way it was legally structured is we were to pay, we are to pay that deferred obligation over a 30-month period, and it's divided into 5, 6-month cycle. The first cycle ended towards the end of January. The next one will be in July. And fundamentally, the way the deal was structured is in the third payment or in the third payment cycle, which is 18 months out from July of 2011, we should have paid or will have paid about 50% of that obligation or $15 million. And the prior payments to that, the way the deal was structured is that we were to repay 50% of any milestones or the value of 50% of any milestones that we received in any particular 6-month payment cycle. And then month 18, we should have achieved a 50% payback and then by month 30, of course, the full amount would have been repaid. Does that help clarify that?

Robin Davison - Edison Investment Research Limited

Yes. You said is pretty much very good, yes. Actually I just came up with the final one, if I might interject. I just wondered if you've seen any evidence of change in the Dacogen sales in the U.S. since we've had the FDA complete response letter on the AML indication, obviously, it has been used in the patient's off label in AML.

James S. J. Manuso

Yes, just to remind people, Dacogen is compendia-listed in the U.S. for elderly AML. It has been used accordingly and is reimbursed, therefore, for an extended period of time. And we always represented that the decision in the U.S. is what was not going to be overly materially critical to our company in part because of the existing compendia listing because of the fact that nothing is currently approved for elderly AML. And then lastly, because the drug goes off forth in designation next year. So we're not taking the position that there has been a major impact one way or the other. Mohammad, any views on that?

Mohammad Azab

Yes. I think, as Jim indicated, there has been uses in AML that has not been recognized in the literature for some time with Phase II evidence. Of course, the presentation at ASCO last year and the follow-up with ODAC which is also a public meeting, I have highlighted the data. And I think clinicians would take their own view of the data and apply it in the clinic. So that will be their own decision. Now we just learned very recently that the NCCN, the National Comprehensive Cancer Network guidelines have upgraded the level of evidence for treating AML for hypomethylating agents from 2B to 2A. So that's basically one just level short of the level 1 evidence so it has gone higher. The hypomethylating agents in general treatment of AML has gone a little bit one notch higher in the NCCN guidelines.

Operator

Next questioner in queue is George Zavoico with MLV Company.

George B. Zavoico - McNicoll, Lewis & Vlak LLC, Research Division

Two questions about Janssen reminded me. I mean they're currently trying to in our -- trying to register Dacogen in more countries. Can you just relate or review exactly if any more countries have been added and if any more are pending?

James S. J. Manuso

All we can say at this point is that it's currently registered in more than 30 countries and they continue to exploit its potential and jurisdictions where they have inroads. We don't have an exact number at this time. Tim, are you aware of any such update?

Timothy L. Enns

George, what we do is we typically would update when Janssen would update and they would update this information prior to a public disclosure. So typically at ASH and at ASCO for their commercial representations they would list the countries and that type of thing. And once that information becomes public, we would then make sure that you have the latest information. So at this point in time, we're still utilizing the 30 countries.

George B. Zavoico - McNicoll, Lewis & Vlak LLC, Research Division

Okay. Fair enough. And you're talking about the antiviral 26893 drug candidate, that's pretty exciting. But you guys have always called yourselves an oncology company. What are your plans for this? Are you going to take it to POC [ph], Phase IIa, IIb and then look for partner? Or could you provide a little more details on that?

James S. J. Manuso

A couple of things in there, George. First, recognize our title as Astex Pharmaceuticals, Inc. So we do allow for variations on the scene. And as a result of the potency of our discovery process, indeed, we can aim at any variety of indications. But I'll hand it over to Mohammad for a discussion of the HCV plans going forward on the clinical and regulatory development front.

Mohammad Azab

Well, we're actively looking, of course, at that partnership as well. I mean, as you have indicated, George, in terms of clinical development, we want to focus more on oncology. So we are discussing with a variety of partners for the HCV program as the data emerge. What we're trying to do and Harren or Martin could elaborate on that is try to pinpoint the differentiation of that agent from other protease inhibitors, both on the market and in clinical development and we had a very, very good discussion on our advisory board at the EASL meeting that was very successful. So we do have a plan to move ahead with this program up to the point when we have a partner. Mind you that the initial clinical trial with HCV are usually very straightforward. They are very well-defined precedents that they are short trials, basically, initially a few days both a single agent and combination and looking at viral response which you can look at very early. So these straws are very, very well understood in clinical development. We will have no problem in conducting initial clinical work for that agent, but we are looking at partners as we move forward with the programs.

James S. J. Manuso

And Harren, maybe you could comment on some of the initial observations relative to the potential differentiation of the drug.

Harren Jhoti

Sure, Jim. George, just to remind you that this compound is a first-in-class in the sense that it inhibits the protease helicase polyprotein by an anesthetic mechanism. So this is quite distinct from the active site protease inhibitors, which are quite low found in the field. Now one of the key differentiators of this product is really associated with the drug interactions, which we believe will be the key because most of it, if not all of these drugs will be given in combination, as we know, in drug viable cocktails. If you look at pretty much all the other protease inhibitors they all suffer from significant or certain notable fit inhibition, [indiscernible] people, 15 [ph] inhibition, and [indiscernible] is really very different from those. It doesn't suffer in any way in that area. So it gives us a lot more opportunity for a combination studies with a whole variety of other direct acting antivirals. So this is a very interesting first-in-class agent with a novel mechanism of action against this protease and also underlying the approach of the pyramid platform, which we fragments to identify these type of drugs.

James S. J. Manuso

And Martin Buckland, perhaps you could comment on some of the thought behind partnering of the drug.

Martin Buckland

Sure. As you might imagine, we speak with potential partners about many of the products in our portfolio from time to time. Sometimes that's done from the point of view of trying to identify a partner for a particular program. Sometimes it's done from a point of view of trying to understand potential partners or perceptions about our programs and how they might be pre-positioned in the marketplace. So we kicked off some sort of very preliminary discussions with potential partners around AT26893 and really those have been done in large part to try and sort of confirm with those partners our perceptions of how this might be positioned in the marketplace and whether they see that there is a real opportunity for a product like this to complement the new generation of direct acting antiviral agents sort of emerging on to the marketplace. So I wouldn't want to set any particular expectations about when we may or may not be able to partner this, but is part of just an ongoing sort of partnering strategy.

George B. Zavoico - McNicoll, Lewis & Vlak LLC, Research Division

And you mentioned an IND sometime this year, I think, you said in the prepared remarks?

James S. J. Manuso

Yes. That is something that would really be in the future. Mohammed?

Mohammad Azab

We are entering into IND-enabling studies but we have not disclosed yet the timing of the IND, George.

George B. Zavoico - McNicoll, Lewis & Vlak LLC, Research Division

Okay, very well. Finally, I mean, you didn't mention -- very little, I mean, I guess, Robin asked a little bit about the Montigen, I guess, since you didn't talk about Montigen much, I imagine there's not much you can add that's probably still in the quiet period, right?

James S. J. Manuso

It's true. There is really nothing that we can add at this time.

If there are no further questions, we can end our call at this time. Thank you again for listening in. And please by all means, follow our progress. Thank you.

Operator

Thank you, sir. Ladies and gentlemen, again, this does conclude today's program. Thank you for your participation and have our wonderful day. Attendees, you may log off at this time.

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