AVI Biopharma Q3 2005 Earnings Conference Call Transcript (AVII)

Third Quarter 2005 Financial Results Conference Call Transcript
Moderator: Denis Burger
November 4, 2005 8:00 a.m. Pacific Time

Operator:

Welcome to the AVI BioPharma 2005 Third Quarter Financial Results conference call.

At this time all participants are in a listen–only mode.

Following management’s prepared remarks, we’ll hold a Q&A session. To ask question please press star followed by 1 on your touchtone phone. If anyone has difficulty hearing the conference please press star 0 for an operator assistance.

As a reminder this conference this conference is being recorded today, November 4, 2005.

I would now like to turn the conference over to Ms. Jody Cain. Please go ahead ma’am.

Jody Cain:

This is (Jody Cain) with Lippert/Heilshorn & Associates. Thank you for participating in today’s call. Joining me from AVI BioPharma are Denis Burger, chairman and chief executive officer, Alan Timmins, president and chief operating officer and Mark Webb, chief financial officer.

This morning AVI BioPharma released financial results for the third quarter of 2005. If you have not received this new release or if you’d like to be added to the company’s distribution list please call Lippert/Heilshorn in Los Angeles at 310–691–7100 and speak with Cheryl Guertin.

This call is also being broadcast live over the Internet at www.avibio.com and a replay of this call will be available on the company’s Web site for the next two weeks.

Before we begin I’d like to note that comments made by management during this conference call will include forward–looking statements within the meaning of federal securities laws. These forward–looking statements involve material risks and uncertainties. For a discussion of risk factors, I encourage you to review the AVI BioPharma Annual Report on Form 10–K and subsequent reports as filed with the Securities and Exchange Commission.

Furthermore, the content of this conference call contains time–sensitive information that is accurate only as of the date of the live broadcast, November 4, 2005. The company undertakes no obligation to revise or update any statements to reflect events or circumstances after the date of this conference call.

With that said, I’d like to turn the call over to Denis Burger.

Denis.

Denis Burger:

Thank you, Jody and thank you all for joining us today. The third quarter and recent weeks have been an exceptionally productive time at AVI and we have several developments to discuss in today’s call.

I will start with a brief overview of several recent events. Mark Webber will summarize our financial results and Alan Timmins will then highlight several programs in greater detail. I will conclude with a review of key programs and will then take your questions.

First, I’m exceptionally pleased to report the initiation of our Phase I/II clinical trial with AVI–4065 in hepatitis C. During the past three years we have compiled a significant amount of data in preparation for this trial and to now be in the clinic is very gratifying. Our goal at AVI is to develop drugs that address life threatening medical needs that affect large numbers of people. HCV certainly meets this profile.

The World Health Organization estimates that $170 million worldwide have chronic HCV infection, which causes an inflammation of the liver and can result in the development of cirrhosis, liver cancer or liver failure.

The current HCV treatment is 24 to 48 weeks of therapy with a combination of interferon and Ribavirin. It is successful in less than 1/2 of the patients infected with genotype 1 HCV, which is the most common form of the virus in the U.S. This treatment regimen has numerous side effects, some of them severe, which make it difficult for nearly of the initially treated patients to tolerate the recommended doses and duration of treatment.

As we have discussed in the past, part of the challenge in treating HCV is the high mutation rate. However as a single–stranded RNA virus, HCV is an attractive candidate for our NeuGene technology which is designed to targeted conserved portions of the viral genetic code that are not likely to mutate over time. This multi–center clinical trial is designed to include up to 80 subjects divided equally between healthy individuals and patients with chronic active HCV. The study is actively enrolling subjects and we expect preliminary data around the end of the year at the earliest.

Moving to our cardiovascular program, I’m pleased to report that we are enrolling patients in Germany in a Phase II APPRAISAL clinical study. This trial is designed to evaluate Resten–MP, which is our NeuGene–based AVI–4126 delivered via our patented micro particle delivery system for the prevention of cardiovascular restenosis.

In this trial Resten–MP is delivered by IV injection in conjunction with the placement of one or more bare–metal stents. Our NUEGENE compound AVI–4126, which we also refer to as Resten–NG, targets the c–myc gene, which is believed to regulate the many downstream events that produce the pathology of restenosis. Resten–NG was found to prevent restenosis in our Phase II AVAIL study in which it was injected directly into the coronary artery using a special drug delivery catheter at the time of stem placement.

In that Phase II study, Resten–NG in a therapeutic dose arm demonstrated statistically significant efficacy in preventing restenosis determined by both quantitative angiography and intravascular ultrasound. The binary restenosis rate was reduced by 75% among patients who received the therapeutic dose.

Prior preclinical studies with our micro particle delivery system have proven it effective at delivering high concentrations of Resten–NG to the sites of vascular injury.

Clearly with the continuing long–term problems experienced with drug eluting stents there is a growing interest in moving away from the polymers that are associated with this complication. This bodes well for both our drug eluting stent program under development and our micro particle delivery system, which avoids drug eluting stents altogether.

These two programs target very large market opportunities. Even today in countries like Germany about 2/3 of stents placed during balloon angioplasty are bare–metal, largely based on concerns of cost effectiveness and long–term complications with drug eluting stents.

The APPRAISAL study’s primary therapeutic endpoint is the subsequent reduction in luminal diameter or late loss from the time of intervention to follow up at six months. Reduction in late loss, which will be measured by quantitative angiography, is the standard indicator cardiologists use to gauge long–term stent efficiency.

With those opening remarks, I’ll ask Mark Webber to review our financial performance.

Mark Webber:

Thanks, Denis. Today I’d like to review our 2005 third quarter results, our cash position and our financial guidance for the year.

Our revenues from license, fees, grants and research contracts in the third quarter of 2005 increased to $3.3 million from revenues of approximately $9,000 reported in the third quarter of 2004. This increase reflects the recognition of $3.2 million in research contract revenue and the receipt of $3.4 million in government funding for work on viral disease projects as well as higher grant revenues.

We were informed in 2004 that we had been allocated $5 million in government funding for the 2005 fiscal year for work on two viral disease research projects. During the third quarter of 2005 we were further informed that this government funding would total $4.6 million.

In September of this year we received $3.4 million of this $4.6 million. The $3.4 million is reflected in this quarter’s financial statement. The remaining funds have not yet been received and are not reflected in our financial statements.

Operating expenses of 2005 third quarter increased slightly to $5.2 million, compared with $5.1 million in the comparable 2004 quarter. The increase was due to higher general and administrative costs, which increased to $1.1 million versus the $1 million in the third quarter of 2004. This increase was partially offset by decreases in research and development expenses to $4.1 million in the third quarter of this year from $4.2 million in the third quarter of 2004.

Approximately $120,000 of this general and administrative increase in the third quarter of 2005 was due to the hiring of additional clinical staff. Approximately $400,000 of this R&D decrease in the third quarter of 2005 was due to lower contracting costs for the production of G&P subunits. These R&D decreases were offset by increases in lab supplies and employee costs.

We reported a net loss for the third quarter of 2005 of $1.7 million or 4 cents per share, which compares to the net loss of $5.1 million or 14 cents per share for the third quarter of 2004.

Revenues for the first nine months of 2005 were approximately $3.4 million, compared with revenues of approximately $145,000 reported for the first nine months of 2004.

Higher revenues this year again reflect recognition of $3.2 million in research and contract revenue and higher grant revenues.

Operating expenses in the first nine months of 2005 decreased to $16 million from $20.3 million for the first nine months of 2004. The decrease in operating expenses was due primarily to a decrease in R&D cost to $12.2 million, compared with $16.9 million in the 2004 period. Approximately $5.5 million of the decrease of R&D expense was due to lower contracting costs for the production of GMP subunits offset by increases in lab supplies, employee costs and clinical trial insurance.

Our 2005 year–to–date net loss was $12.1 million or 28 cents per share, which compares to the net loss of $19.8 million or 55 cents per share for the first nine months of 2004.

We reported cash, cash equivalents and short–term securities of $31 million as of September 30, 2005, an increase of $11.4 million from December 31, 2004. This increase is attributed primarily to the completion of a direct equity placement with several institutional investors for the purchase of 8 million shares of AVI common stock at $3 per share, resulting in net proceeds to the company of $22.3 million, which we announced in January of this year. This will offset by $9.9 million used in operations and approximately $1.2 million used for the purchase of property and equipment and patent–related costs.

We are modifying our financial guidance downward for the full 2005 year. We expect cash burn for the year to be a little less than originally estimated and in the range of $21 to $23 million.

With that overview, I would like to now to turn the call over to Alan Timmins.

Alan Timmins:

Thanks, Mark and let me add my welcome to those of you joining us this morning on the call and on the Internet.

Our NeuGene infectious diseases programs include projects that are being conducted through various collaborations with premier scientists and institutions, governmental agencies and pharmaceutical companies.

Some of the governmental projects are performed under Cooperative Research and Development Agreements or CRADAs, which we have in place currently with the Walter Reed Army Institute of Research, the Centers for Disease Control and Prevention, or CDC, and the U.S. Army Medical Research Institute of Infectious Diseases, or USAMRIID.

Today I want to discuss some highlights from our Department of Defense funded collaborative work with USAMRIID that demonstrated the effectiveness of our NeuGene technologies in combating the Ebola and Marburg viruses and the ricin and anthrax toxins.

Let’s start with Ebola. Ebola virus causes hemorrhagic fever, which historically has killed up to 80% of infected humans. There are currently no approved treatments for Ebola. It’s noteworthy that UAMRIID is the only laboratory in the Department of Defense and one of only a few in the U.S. equipped to safely study highly hazardous infectious agents such as Ebola virus.

Studies with our NeuGene compounds conducted at USAMRIID have now provided evidence of robust efficacy in multiple experiments with mice, guinea pigs and primates. Previous attempts by USAMRIID with the Ebola virus using other technologies of other companies were not successful in treating multiple species. Using the Ebola virus mouse and guinea pig models we targeted six of the seven Ebola virus genes with single and combination agents in prophylactic and therapeutic protocols.

We identified the most effective protocols that resulted in 100% survival at low doses of drug combinations targeting different Ebola genes when administered 24 to 48 hours after virus challenge. Based on the mouse and guinea pig experience, a three–drug combination was used in initial primate studies, which also were successful.

We also have announced progress with NeuGene compounds against the Marburg virus. Marburg hemorrhagic fever, although rare, cropped up in a recent outbreak in Africa and demonstrated a very high mortality rate.

In tests with guinea pigs challenged with high doses of the virus that were 100% lethal in untreated animals, a high survival rate was observed in single agent protocols targeting distinct Marburg genes. We now have plans to test combination agents in experiments similar to those successfully conducted with Ebola.

We also reported positive results from preclinical studies with ricin and with anthrax. Ricin is an enzymatic toxin from the caster bean that inhibits cells from producing proteins, resulting in rapid cell death. Ricin degrades the initiation site on ribosomes, thus blocking protein production from starting. We use antisense to specifically hide the RNA initiation site from the ricin in a reversible manner. Preliminary study results indicate that NeuGene compounds targeting the ricin binding site represent a feasible approach to treatment and proof–of–principle has been established.

Anthrax is an acute infectious disease caused by the spore forming bacterium Bacillus anthracis. The key in its pathogenesis is the production of a lethal toxin. This toxin associates with specific cellular proteins to trigger apoptosis. In the past anthrax in humans was due to an occupational exposure to infected animals or to their products.

However in terms of bioterrorism inhalation anthrax is of course a great concern. Case fatality rates for inhalation anthrax are high, even with appropriate antibiotics and supportive care. Following the bioterrorist attack in the fall of 2001, the case fatality rate among patients with inhalation disease all of whom received aggressive antibiotic therapy was 45%.

Experiments conducted in cell culture indicated that our NeuGene compounds, which had been designed to down regulate the target of the lethal toxin led to increased cell survival without extensive cell death. Preliminary survival experiments in mice showed that almost all mice treated with specific NeuGene compounds survived a lethal challenge with anthrax spores. Together these experiments indicate proof–of–principle of this approach and additional experimentation is ongoing.

We believe that our potential to safely and efficaciously treat a broad range of viruses and even apply this technology against toxins is being widely recognized, as evidenced by our inclusion in an initial 2006 defense funding allocation.

The U.S. Senate Committee on Appropriations has preliminarily allocated $22 million for our research and development programs as part of the federal government’s next fiscal year defense spending bill. It includes allocations for the Ebola, Marburg — Ebola and Marburg viruses as well as the ricin and anthrax toxins plus a new program targeting dengue virus.

Additionally, this allocation, NeuGene technology to combat some of the feared and challenging bioterror threats.

I caution that this spending bill must now be approved by the full Senate, and that the total amount awarded to our company is subject to change.

Before turning the call back to Denis, I’d like to briefly comment on our introduction of a new application for NeuGene technology we call Exon Skipping Pre–RNA Interference Technology, or ESPRIT.

ESPRIT therapeutics are designed either to delete disease causing genetic sequences or to skip functional sequences to redesign proteins that are over expressed or harmful in certain diseases. This is a new approach to solving genetic disorders and diseases caused by over expressed or harmful genes. ESPRIT therapeutics allow for fine genetic surgery at the RNA processing level, providing a new and highly potent tool for altering many disease mechanisms.

We’re pursuing a number of genetic disorders as well as diseases with an immunologic component. The first use of this technology was conducted in Duchenne’s muscular dystrophy through a collaboration with Dr. Steve Wilton, an associate professor and head of the experimental molecular medicine group at the Australian Neuromuscular Research Institute in Perth, Australia.

Muscular dystrophy is the common name for several progressive hereditary diseases that causes muscles to weaken and to degenerate. It impacts an estimated 50,000 to 250,000 individuals each year.

In a mouse model by targeting the defective Duchenne type muscular dystrophy dystrophin gene with an ESPRIT compound, Dr. Wilton was able to force the cell to snip out the disease causing mutation in that region. Using this approach a mostly functional dystrophin protein could be made that would previously only have been a non–functional protein.

And with that, I’d like to turn the call back to Denis.

Denis Burger:

Thanks, Alan. As we have discussed we believe our NeuGene–based antiviral and antitoxin projects, which we call our “rapid response therapeutics,