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Executives

Russ Medford - President and CEO

Mark Colonnese - EVP for Commercial Operations and CFO

Dr. Charlie Montgomery - SVP for Business Development and Alliance Management

Joe Gaynor - SVP and General Counsel

Zan Fleming - Acting CMO

Analysts

Leah Hartman - CRT Capital

AtheroGenics Inc. (AGIX) Q4 2007 Earnings Call February 14, 2008 9:00 AM ET

Operator

Good morning, ladies and gentlemen. My name is Jerry, and I will be your conference facilitator. At this time, I would like to welcome everyone to the AtheroGenics Fourth Quarter and Year End 2007 Financial Results Conference Call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be question-and-answer period.

Please allow me to remind you that statements made by management during this teleconference that relate to events or developments that the Company expects or anticipates will occur in the future are deemed to be forward-looking statements. AtheroGenics cautions investors not to place undue reliance on these forward-looking statements. These and other such statements are subject to certain factors, risks, and uncertainties that may cause actual results, events, and performances to differ materially from those referred to in such statements.

For example, additional information relating to the safety, efficacy or tolerability of AGI-1067 may be discovered upon further analysis of trial data. The Food and Drug Administration might prohibit or limit further studies of AGI-1067 or require additional clinical trial work that may take a significant period of time or require significant additional resources to complete. We cannot ensure that AGI-1067 will ever be approved or be proven safe and effective for use in humans.

These and other risks are discussed in AtheroGenics' Securities and Exchange Commission filings, including, but not limited to the risks discussed in AtheroGenics' annual report on Form 10-K for the fiscal year ended December 31, 2006, and quarterly report on Form 10-Q for the quarter ended September 30, 2007, and are specifically incorporated by reference into this conference call.

I'd like to turn the call back over to management. Thank you, you may begin.

Russ Medford

Thank you, operator. And thanks for joining us this morning on AtheroGenics' conference call to discuss our corporate and clinical progress, as well as our financial results for the fourth quarter and yearend 2007. Joining me this morning is Mark Colonnese, our Executive Vice President for Commercial Operations and Chief Financial Officer; Dr. Charlie Montgomery, our Senior Vice President for Business Development and Alliance Management; Joe Gaynor, our Senior Vice President and General Counsel and Dr. Zan Fleming, our Acting Chief Medical Officer

I will begin our call this morning by providing some brief opening remarks before turning the call over to Dr. Fleming for an update on our ANDES clinical trial progress. Mark Colonnese will then review our financial performance for the fourth quarter and full year 2007 after which we will open up the call for your questions.

We begin 2008 with a new opportunity to provide hope for patients, who face the challenge of living with diabetes. Until recently it was taken for granted that if one could control blood sugar levels in diabetic patients, it would contribute to their overall health and well being with the reduction in their probability of developing diabetic retinopathy and eye problems and renal problems and peripheral problems as well as a reduction in their cardiovascular complications of diabetes, such as heart attacks.

In 2000, that assumption regarding cardiovascular complications was brought in to question, with an analysis of a large number of diabetes that appeared to show that leading class of antiglycemic agents could actually cause harm to the cardiovascular system of patients with diabetics. This assumption was challenged again very recently, when a arm of a diabetes study that provided intensive blood sugar lowering was stopped due to an increase in deaths in patients taking the intensive diabetes therapy.

We have known for years that both diabetics and cardiovascular disease are complex interrelated pathologic conditions with two-thirds of patients with diabetes dying of cardiovascular disease. There remains a clear need for an agent that can address the common mechanisms of both diseases and provide durable therapeutic benefits for both conditions.

To our knowledge AGI-1067 is the most advanced pharmaceutical agent in clinical development that has the potential to address both conditions. Data from the ARISE Trial has provided evidence that 1067 can improve glycemic control and help patients including those with diabetes lower their risk of having serious cardiovascular events such as heart attacks and strokes. In just a few months now we should get a clear answer to the first question can AGI-1067 lower high blood sugar in a well controlled diabetes clinical trial.

We are all eagerly awaiting the results of our interim analysis, as this should give us the first look at the efficacy and safety as well as provide us with an early trend indicating how the drug is performing after the first three months of dosing. We remain on track to report the final results in the second half of this year. Needless to say, we are all focused on making sure that we are conducting ANDES with all appropriate diligence and care and efficiencies.

With that introduction, I'll now turn the call over to Zan. Zan

Zan Fleming

Well thanks Russ and good morning to everyone. As the physician, who is focused much of his medical career on studying therapies or patients with diabetes, I can certainly echo Russ's thoughts about the quandary we in the field find ourselves. And at the present time our need for new agents with different mechanisms that can confer both macrovascular and microvascular benefits and those afflicted with diabetes has never been greater. I can also report the interest in AGI-1067 like our thought leaders in the field is keen.

We have met with a number of these experts recently and they are highly intrigued by AGI-1067 antioxidant, anti-inflammatory mechanism that is unique among approved therapies and those underdeveloped. The experts are excited by data that not only support CV and metabolic benefits of 1067, but the drug's effect on slowing develop and that of type II diabetes itself.

Now, let's turn our attention to the ongoing ANDES Phase III trial of AGI-1067 and type II diabetes. Of course the form of disease of diabetes it is by far the most prevalent that afflicts about 90% of those with diabetes. ANDES completed patient enrollment on schedule in the first half of December of 2007 randomizing 999 patients into the study.

You'll recall that we agreed with FDA to drop the 300 milligram arm. So, the study has continued with two active dosing arms 75 and 115 milligram doses and a placebo arm and which patients can be on one or no other diabetes medication. Given the timing of completion of enrollment, we are very confident that we can report our interim result within the timeframe we have projected, the second quarter and it is more or likely to be earlier than later.

ANDES is designed to be a pivotal registration study with A1c is the primary efficacy outcome. It's the traditional regulatory endpoint for approval of Type II diabetes therapies. What might we expect from ANDES in terms of this key indicator of efficacy? The A1c treatment effect in diabetic people in ARISE was about 0.5 units, a clinically meaning result. However, recall that the diabetic control in ARISE was very good, most of the subjects were at or near the commonly recommended A1c target of 7.0%.

ANDES is testing a more representative population of people with Type 2 diabetes then was the case for ARISE that is people who need additional medication to control glycemia. Analysis of the ARISE study showed that A1c reductions from baseline were greater in patients who had higher A1c levels. As an example and more than the 100 patients with an A1c level of higher than 9%, AGI-1067 reduced A1c by more than 1.5. That's 1.5% from baseline.

ANDES population has a starting mean baseline A1c of 8.6, which provides more room for improvement than was the case for ARISE. Thus we expect to see an A1c treatment effect in ANDES that is equal or greater than that seen in ARISE. It is true that ANDES is using lower doses than the 300 milligram ARISE dose. However, we do have animal and clinical data including from plaque imaging studies, which suggest that the 150 milligram dose used in ANDES has most of the efficacy of the 300 milligram dose use in ARISE.

One animal study for example demonstrated that AGI-1067 improves insulin resistance, similar to Rosiglitazone, at doses that produce drug exposure add or below that expected from the 150 milligram human dose. Other differences between the designs of ARISE and ANDES are likely to drive larger A1c treatment effects. But as in ARISE, ANDES permits Metformin, sulfonyurea and TZDs to be used as background therapies since, these are all therapies are the ones commonly used in sequence and in combination in real world practice.

In summary, we had good reason to expect in A1c treatment effect in ANDES that is clinically important and well above the regulatory efficacy threshold. In addition to glucose lowering effects, AGI-1067 has shown in ARISE evidence of reduced risk of heart attack and stroke not only in diabetic patients, but in those with pre-diabetic condition known as impaired fasting glucose. We continue to look at the ARISE dataset and identify further evidence of the AGI-1067's ability to provide both metabolic and cardiovascular benefits

On a related note, our ARISE manuscript is currently in peer review and we are awaiting news of its acceptance from a well regarded journal. Needless to say, we are very much looking forward to seeing and announcing the results from our interim analysis soon. Interim analysis will provide us a good sense of how well the two doses of AGI-1067 are performing on glycemic control and safety measures after 12 weeks of treatment.

And with that, I'll now turn the call over to Mark for his financial perspective. Mark?

Mark Colonnese

Thank you, Zan. Good morning everyone. Let's start by looking at our statement of operations. Total revenue for the fourth quarter was $3.1 million as compared to $11 million for the same three month period in 2006. The decline in revenues in the fourth quarter reflected the winding up of our license agreement with AstraZeneca related to AGI-1067.

We had no license revenue over this past quarter compared to $6.3 million of license revenue recorded during the same period of 2006. In addition, we had lower revenues from R&D service fees that we received for conducting the FOCUS clinical study, which has been concluded.

Revenue for the full year 2007 increased to $52.3 million as compared to $31.7 million for the same period in 2006. The increase in the 12 month period principally reflects recognition of the remaining unamortized balance of the upfront license fee that we got from AstraZeneca that was recorded due to the termination of the agreement earlier this year in the second quarter. Also contributing to the increased revenue for the 12 month period were higher R&D service fees for conducting the FOCUS clinical study.

Moving to operating expenses, research and development expense for the fourth quarter of 2007 decreased to $13.6 million, as compared to $28.3 million for the fourth quarter ended 2006. And for the 12 month period, expenses for R&D also decreased to $72.7 million as compared to $82.9 million for the same period in 2006.

The decline in expenses for both periods was primarily due to the completion of the ARISE clinical trial early last year and reduced staff costs resulting from the company's organizational restructuring in May of 2007. Partially offsetting these declines were costs for a new activity in 2007, our ANDES Phase III study in diabetes and higher FOCUS expenses which affected the 12 month comparison only.

In marketing, general and administrative expenses, AtheroGenics reported a decrease to $3.3 million for the fourth quarter of 2007 from $3.4 million for the same period in 2006 reflecting lower stock based compensation. For the full year 2007, MG&A expenses increased to $13.9 million as compared to $13.4 million for the same period in the prior year. The 12 month period increase was due to higher marketing related costs, which occurred in the first half of the year.

Moving to restructuring and impairment costs, there were none incurred in the most recent quarter, while we expensed $10 million for the year-to-date period, which included the write-off of impaired manufacturing assets resulting from the transition of commercial activities from AstraZeneca as well as severance and asset impairment costs from the organizational restructuring all of which occurred in the second quarter of 2007.

Interest income in the fourth quarter decreased to $1.2 million from $2.2 million for the comparable period in 2006 and decreased to $6 million for the full year 2007 compared to $9.2 million for the full year 2006. The decrease in both periods reflected reduced levels of invested cash.

Interest expense increased to $3.4 million for the fourth quarter of 2007 from $2.1 million for the comparable period of 2006 and increased to $11.1 million for the full year 2007 from $8.4 million for the full year 2006. The increase in interest expense for both periods was due to additional interest related to the $60.4 million or 4.5% convertible notes due 2011 that we issued in exchange for $38 million of our convertible notes in 2008, as well as the accretion of the discount for the newly issued notes.

The year-to-date comparison was also affected by the non-cash write-off of deferred debt issuance costs related to the retired 2008 notes that occurred in the third quarter. So in summary our net loss in the fourth quarter 2007 was $16 million or $0.40 per share compared to $20.7 million or $0.52 per share for 2006 and net loss for the full year 2007 was $49.5 million or $1.25 per share compared to a net loss of $67.3 million or $1.71 per share for the same period in 2006.

Now turning to our balance sheet, we ended the quarter with approximately $93 million in cash, cash equivalents and investments, which is right inline with our guidance for the year. This is more than enough to finish the ANDES trial, which is scheduled to conclude in the second half of this year.

Finally our financial guidance for the full year 2008 is as follows. The estimated cash usage for operations will be $40 million to $50 million and this does not take into account any cash used for debt repayment. The full year net loss per share for 2008 is estimated to be in the range of $1.40 to a $1.50 per share.

And with that I'll turn the call back to Russ.

Russ Medford

Thank you, Mark. With that let's ask the operator to open up the call for questions. Operator?

Question-and-Answer Session

Operator

(Operator Instructions) Thank you. Our first question comes from the line of Leah Hartman with CRT Capital. Please proceed with your question.

Leah Hartman - CRT Capital

Good morning and thank you for taking my call. I did want to focus on the interim data announcement that were expecting in Q2 and I believe in the past you've guided that, that would be most likely 3-month data on about 90% of the patients is that correct?

Zan Fleming

Yes, that is correct.

Leah Hartman - CRT Capital

Okay. And then you said you've been in discussions with thought leaders, are those thought leaders more in the cardiovascular space or with Diabetologists or Endocrinologists having great interest in the antioxidant and anti-inflammatory properties of 1067, or is it a mix?

Zan Fleming

Certainly is a mix. We continue to be speaking to both cardiovascular experts and certainly to people who are experts in the diabetes arena. In fact, we have had recent discussions with our consultants and as I mentioned, they have been very encouraged by the data from ARISE.

Leah Hartman - CRT Capital

Clearly that was a very well populated trial, the ARISE trial and as you go forward and we have a diabetes, potentially a diabetes indication and as you described, you have seen that activity at different dosing level and expect to see it. At these lower dosing levels, but the real win in the product would come with I believe another Phase III trail that shows and is powered to show the cardiovascular properties as well as the diabetes properties. Where are you in those discussions, are you, is that something you're looking to do, looking to announce once you have the interim data some sort of partnership given the balance sheet that you are facing today?

Russ Medford

Let's first address the marketing question that is implied by that question if you don't mind, Leah.

Leah Hartman - CRT Capital

Sure.

Mark Colonnese

Yes, Leah from our standpoint obviously there is a global epidemic of diabetes ongoing and given that less than half the patients reach their target about glucose levels. There is certainly a clear unmet need for a new class or new classes of anti-diabetes drugs.

We believe what we've seen so far in AGI-1067's profile as a glycemic controller agent that's additive to other commonly used agents would be very useful in the field. In addition the evidence that we've that it can attack not only the root of metabolic, but also vascular problems should put it in a very competitive position in the diabetes marketplace.

Leah Hartman - CRT Capital

And then so as you move forward with the goal of bringing to the FDA filing for a diabetes indication, I guess two questions. One is are you going to continue to monitor the patients, who've been in the six month trial for you to actually you're talking about the slowing of the progression of the disease how are you going to show that? Six months is pretty short right?

And then secondly, would the goal be to conduct a Phase III trial show again powered with a notably higher number of patients to show some cardiovascular event? And when might you make that determination? Is that post the full data analysis of ANDES?

Russ Medford

Zan?

Zan Fleming

Thanks, Leah good questions. The immediate objective of course is to register a diabetes indication and we'll be able to complete the planning of the Phase III program, as we get the ANDES result. You can be assured that we're going to continue to pursue a cardiovascular benefit indication. But the immediate goal is to achieve a standard general indication for type II diabetes.

Leah Hartman - CRT Capital

And then I'll try and step back in the queue and let someone have a chance. But with respect to the 300 milligram arm that you did discontinue enrollment in that arm for the ANDES trial, can you tell us how many patients were already enrolled in that? And did they continue their full course of treatment or what happened with those patients?

Zan Fleming

Leah, 112 individuals were randomized to the 300 milligram treatment arm and they were discontinued from the study. We of course follow them for safety the exposure, but they will not be otherwise evaluated.

Leah Hartman - CRT Capital

So, they maybe folded into the entire data base package that goes to the FDA?

Zan Fleming

That's right.

Leah Hartman - CRT Capital

Okay, all right thank you. I'll jump back in the queue.

Operator

(Operator instructions)

Russ Medford

Any other questions operator?

Operator

No. There are no further questions at this time.

Russ Medford

Well, that was short. I appreciate. Thank you very much for everyone attending this conference call. We are looking forward to updating you on interim results next quarter. I suspect that conference call it might be significant more interaction with our investment community then. But thank you so much for joining us. Have a good day and happy Valentine's Day. Don't forget.

Operator

Ladies and gentlemen, this does conclude today's teleconference. You may disconnect your lines at this time. Thank you for your participation.

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