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Chelsea Therapeutics International Ltd. (NASDAQ:CHTP)

Q4 2007 Earnings Call

March 11, 2008 5:00 pm ET

Executives

Simon Pedder, Ph.D. - President and CEO

L. Arthur Hewitt, Ph.D. -Vice President, Drug Development

J. Nick Riehle, MBA - Vice President, Administration and CFO

Analysts

Juan Sanchez -Punk, Ziegel & Co.

Howard Liang -Leerink Swann & Co

Martin Serelli - Ellea Capital

Operator

Good day and welcome everyone to the Chelsea Therapeutics International Fourth Quarter and full year 2007 Financial Results Conference. Today’s call is being recorded and at this time I’d like to turn the program over to Miss Katherine McNeill. Please go ahead ma’m.

Katherine McNeill

Good afternoon and thank you all for participating in today’s conference call. Joining me from Chelsea Therapeutics is Simon Pedder, President and Chief Executive Officer, Nick Riehle, Chief Financial Officer and Art Hewitt Vice President of Drug Development.

Before we begin, I’d like to take a moment to remind listeners that we’ll be making forward-looking statements on this call, including statements regarding our drug development programs, market opportunities and regulatory process. Forward-looking statements on this call are made pursuant to the Safe Harbor Provisions of the Federal Securities Laws. Information contained in the forward-looking statements is based on our current expectation, is subject to change and actual results may differ materially from these forward-looking statements. Chelsea does not undertake to update such forward-looking statements to reflect any changes, events, or circumstances that may materially effect the company’s expectations after the date of this conference call. Factors that can affect actual events or results to differ include risks associated with the company’s ability to attract and retain partners for technologies, protect its intellectual property, raise additional capital, conduct successful clinical trials, obtain regulatory approvals and gain acceptance from the market place for its products; as well as reliance on collaborative partners, a limited number of drug candidates and management, including Dr. Pedder. These and additional risks are discussed in Chelsea’s filings with the SEC. These documents are available on Chelsea’s website and we encourage you to review them carefully.

With that said, I’d now like to turn the call over the Dr. Pedder. Go ahead Simon.

Simon Pedder

Thank you Kate and thanks to all of you for joining us this afternoon. We’ll begin this afternoon with Nick’s review of our financial results. And then I’ll go into some detail on our operating activities for the past year and provide an update on recent developments and insights as to what we expect in the upcoming year. Finally we’ll open up the call for Q&A.

So, now I’d like to hand it over to Nick.

Nick Riehle

Thanks Simon and good afternoon everyone. For the three months ended December 31, 2007, we had a net loss of 4.8 million or $0.189 per share, compared to 2.4 million or $0.12 per share for the comparable quarter in 2006. Our net loss for the year ended December 31, 2007 was 15.1 million or $0.66 per share, compared to a net loss of 8.7 million or $0.46 per share for the prior year. As has been the case throughout the past year, the higher net losses reflect increases in R&D associated with our expanded portfolio of product candidates and potential indications and in particular the impact of our Droxidopa development program.

Cash used for operations was 4.1 million in the fourth quarter of 2007 and 10.7 million for the full year. During the year we completed two equity offerings, which combined resulted in gross proceeds of approximately 61.4 million.

We ended the year with 62.7 million in cash and short-term investments versus 15.9 million in December 31, 2006 and based on current development plans, we expect to spend between 38 and 43 million of this through the end of 2008.

As many of you will have noted from our press release, out of the 62.7 million in cash and short-term investments, 28.6 million is shown as short-term investments reflecting our holdings in certain auction rate securities. As of today these holdings have been reduced to approximately 26.5 million. All of these securities are backed by student loans and all have AAA credit ratings, except for one investment of 750,000 which is an A rated investment. As those familiar with the option rate situation are aware, despite the liquidity questions that have emerged following recent auction failures, the investments themselves continue to pay interest at or above market rate and the underlying collateral remains in place. Simon.

Simon Pedder

Thanks Nick. I will now take a few moments to discuss the operational activities underlying our financial results before opening up the call to your questions.

Let me start by saying how pleased I am to be speaking to you today from an entirely new perspective, one which the company not only has a pivotal Phase III program, but two Phase II trials underway. This is an important milestone for Chelsea and with two additional trials in the works 2008 promises to be a very exciting and rewarding time.

The clinical work being conducted in 2008 should provide the data necessary to follow first marketing approval in neurogenic orthostatic hypertension in 2009, provide definite proof of concept in two blockbuster indications, mainly rheumatoid arthritis and fibromyalgia, and also expand the principle market opportunity for Droxidopa in intradialytic hypotension. We are of course aware that solid meaningful clinical data, like this, is a primary evaluation driver for companies like ours and our goal remains progressing each of our clinical programs towards this end. We would not, however, be in such a firm position to execute against this goal in 2008 if it were not for the significant preparations undertaken in 2007.

During the past year we undertook several initiatives that would not only enable to initiation of five clinical trials, but to do so from a position of great strength, to ensure the highest probability of success in each trial. Proudly speaking, this included the successful reformulation of CH-1504, obtaining permission from the FDA to move Droxidopa directly into Phase III testing and the expansion of our Droxidopa development program to include additional indications such as intradialytic hypotension and fibromyalgia 2007 was a very productive year for our Droxidopa program. We are in an enviable and some what unique position of knowing that Droxidopa is a safe and effective treatment based on the extensive clinical testing and subsequent long-term use by tens of thousands of patients in Japan. From the beginning, the greatest risk associated with our development of Droxidopa has been a regulatory risk and in that regard we made substantial progress further de-risking the program in 2007.

We started the year with approval from the FDA for our orphan drug designation in neurogenic orthostatic hypotension. As you all know, this was a critical first step towards launching our clinical development of Droxidopa as it serves the basis for the initial marketing exclusivity and our lead indication of neurogenic orthostatic hypotension. In addition to securing orphan status designation, we also met with the FDA to determine the clinical requirements for regulatory approval and we were pleased by the agency’s acceptance of the comprehensive data generated by [indiscernible] and their rapid buy in to move the compound directly into Phase III testing. Obviously the most significant part of these discussions with the agency centered on the review of our Phase III protocol and as I have indicated to you before, we are extremely pleased by the agency’s support during this process. Typically we believe the acceptance of our enrichment design, combined with the small size and relatively short duration of both trials reflects the agency’s support and therefore encouraging from a regulatory standpoint and certainly increases the odds for a successful clinical outcome.

The most tangible evidence of the FDA’s support, in greater fee risking for this program, is the special protocol assessment we received to study 301. In an era in which so many companies are facing significant challenges from the FDA we are very encouraged, not only by the tone of each of our meetings with the agency, but also the successful outcome of each of these interactions to date.

As we look at the year ahead, we know the challenges and the risks are not entirely behind us, but that we are moving ahead with every possible advantage. The two biggest challenges we face in the successful execution of our registration program remain recruitment and effective management of our clinical sites.

While we believe our trials are well designed to deliver positive results, we cannot forget that neurogenic orthostatic hypotension is an orphan indication. And as isn’t the case for all orphan drug trials, availability and access to patients is more limited than a larger indication. Historically orthostatic hypotension trials, as was in the case of Mydrin, have taken a very long time to enroll. We have implemented two key strategies to overcome this challenge. We are enrolling a high number of clinical sites relative to the number of patients required to complete the trial and we have been aggressive in our efforts to build awareness around physicians treating orthostatic hypotension. We believe that both these initiatives will serve to significantly decrease the amount of time required to treat these patients.

The second challenge will be effective management of our investigative and clinical trial sites. Those of you familiar with our protocol can appreciate that with the relative complexity comes the need to ensure that each of our investigators are thoroughly trained and that each of our sites are compliant with all the components of the protocol. We are therefore undertaking a rigorous and hands-on approach to the screening, selection and training of each of the investigators who are participating in our registration trials. This of course means the process is somewhat labor intensive and time consuming, especially at the beginning of the trials, but we strongly believe that the added time and effort will ultimately be rewarded and again, go a long way towards ensuring the highest probability for success and a timely clinical outcome.

There remains much work to be done, but we are looking forward to the fruits of our labor and the progress of our Phase III program in 2008.

As you know, we have already begun enrolling patients into study 302 and we look forward to enrolling patients into 301 in the coming quarter. Based on the current information and enrollment plans, we continue to expect results from both studies towards the end of this year and I look forward to updating you on our progress through out the year.

As will recall, it was at this time last year that I shared with you our intentions to expand our development of Droxidopa beyond our initial indication in neurogenic orthostatic hypotension. Specifically, we announced our intent to begin development in intradialytic hypotension or IDH as well as our interest in evaluating the efficacy of Droxidopa in fibromyalgia. Both of these indications are now active programs and each offer a compelling upside to the value of the compound. AS IDH is another approved indication in Japan, it offers a second low-risk opportunity for us to leverage the existing Japanese data to expand the potential market for Droxidopa here in the US.

While IDH may initially be a smaller market than NOH, given the anticipated three times a week dosing versus three times a day dosing in NOH, it is an indication for which there is no approved drug treatment and a significant economic rational exists for a safe and effective therapeutic option.

It is also a market that is predicted to grow significantly, as the number of patients undergoing dialysis continues to increase, especially in the US. Keith Schmidt our VP of Marketing, has had the opportunity this past year to conduct some early market research among physicians in this indication. And the results of this were a firm belief there is a compelling market for Droxidopa in IDH.

Later in the fourth quarter of 2007, we initiated our Phase II trial NIDH. We are pleased to be working with the data on this trial. Not only will this help with patient recruitment, but establishes a relationship with a market leader in dialysis treatment. This 75 patient double-blind dose response trial is approximately six weeks in duration and we expect the results of this trail to be available early in the fourth quarter of this year.

The next indication we will be exploring with Droxidopa is fibromyalgia. Unlike either NOH or IDH, this will be a new indication for Droxidopa. Not only does this indication indicate a significant market opportunity, it is an indication which also offers enhanced IT protection. While the indication is not one that is approved in Japan, there is sufficient evidence from prior clinical investigations, especially in pain, to suggest that Droxidopa could be a successful treatment option in this indication.

Further, given the side effect profile of products for the treatment of fibromyalgia, Droxidopa should certainly enjoy a superior probability profile. As we have previously mentioned, we are truly thrilled to be working with Dr. Ernest Choy on our Phase II study in this indication. Dr Choy is a consultant rheumatologist in the department of rheumatology at King’s College in London and chaired the UL working group on development recommendations for the treatment of fibromyalgia. In consultation with Dr. Choy, we have finalized our design for this trial, which is currently designed to be an eight-week study evaluating multiple dosages of Droxidopa alone and in combination with carpidopa in approximately 120 patients. The primary end point will be pain as measured by the McGill Pain Questionnaire, however like other fibromyalgia studies, we will be using a full battery of additional scales, especially the Fibromyalgia Impact Questionnaire, the multi-dimensional fatigue inventory, the Hamilton Anxiety Depression survey, Jenkin’ Sleep Problems scale, the Multiple Abilities Self-Report questionnaire for cognition, among others as secondary emblem.

The protocol for this study- will be submitted to the NHRA, the UK’s health authority shortly. AS you know, the standard NHRA review period is 60 days and once we have their approval, we will look forward to getting this trial underway in the UK.

Now, one of they key issues we will be addressing in this filing will be carpidopa’s status as an investigational drug in this indication. Interestingly though, carpidopa has been approved and widely used in combination with Levadopa in the UK for many years and certainly has been administered in this context with carpidopa in Japan in Parkinson patients. However, carpidopa is not currently approved as monotherapy. We will of course be providing them the supplemental data reporting the safety and the use for our purposes in this study. Pending appropriate and finally authorization from the HRA, we expect to initiate this trial late in the second quarter and look forward to seeing the results from the study in the first half of 2009.

As I mentioned, the planned fibromyalgia study offers one opportunity to explore one additional prudent IT enhancing strategy, that being combination therapy. The other near term strategy we are interested in pursuing is the development of a once a day formulation. We have conducted and entered an evaluation of the existing once a day technology with specific emphasis on the strength of the corresponding IT; following this evaluation, we have narrowed the list of potential partners significantly and have initiated feasibility testing. We expect that we will be able to make a final determination regarding a partner and move forward with the once a day development program following the conclusion of this feasibility testing, which we expect to be available late in the third quarter of this year.

So as you can see, 2008 promises to be both a productive and rewarding year for our development of Droxidopa. With two pivotal Phase III trials in neurogenic orthostatic hypotension, a Phase II study in intradialytic hypotension and exploratory proof of concept in a major new indication, fibromyalgia, we are geared up to begin generating significant clinical results in this program.

Our focus continues to be to drive the near term value for Droxidopa to rapid commercialization in neurogenic orthostatic hypotension. We are continuing to seek opportunities to expand the potential indication and the intellectual property that will sustain and grow the long-term value of the drug.

No less exciting, however, is the progress we anticipate in our antifolate development program. Here again we have laid a very strong foundation for success. One of the most significant developments to Chelsea in 2007 was the validation of the successful formulation of our lead antifolate drug candidate CH-1504.

In the second quarter of 2007 we initiated a bioequivalent of CH-1504, which allowed us to evaluate the relative bioavailability of the new formulation, as well as meeting the regulatory requirements for the commencement of Phase II testing. The results of this evaluation exceeded our expectations with a greater than ten-fold improvement in the relative bioavailability. This dramatic improvement in the relative bioavailability offered significant advances for our future clinical development of CH-1504 and in fact each of the compounds in our antifolate portfolio. With increased bioavailability we believe we can dramatically decrease the potential for variability and plasma levels and thus increase the likelihood of a more predictable clinical response using substantially lower dosages of CH-1504.

With these results in hand, we were able to determine our final dosages for our Phase II trial in rheumatoid arthritis and initiate the head-to-head comparison against methotrexate. This Phase II study is now well under way and progressing very well. Later this year, likely in early Q4 after half the patients have completed the study, we will plan to conduct a safety and data review. This analysis will be conducted by an independent data monitoring board that will look for sufficient signals of efficacy and bearing any significant safety concerns and make a recommendation regarding the continuation of each arm of this study.

Based on the enrollment and the duration of the trial, we anticipate the data safety monitoring board should be able to provide us with their report early in the fourth quarter. Subsequently, we would then anticipate top-line results from the full trial to be available late in the first quarter of 2009.

Similar to our approach with Droxidopa, we have taken a comprehensive approach to the development of our portfolio with antifolate drug candidates. As we progress with the Phase II evaluation of CH-1504 we continue the clinical developments of CH-4051, our fast forward to Ch-1504. Specifically, we are now conducting IND enabling tox work and will continue this work in 2008, to keep pace with the advancement of CH-1504.

Additionally, as the applications for successful antifolate compounds abroad, we have also begun looking at other molecules in the portfolio for possible applications and additional indications especially [indiscernible]. So in addition to the Phase II work on CH-1504, the IND enabling tox growth on 4051 we also plan additional pre-clinical work on Ch-4446 and other logs as drug candidates in oncology indications. Again, these are all initiatives designed to support the near term value while continuing to expand the long-term potential of our assets.

Now as I mentioned to you at the opening of this call, I am very excited to be speaking to you now during a new and exciting period in Chelsea’s history. During the coming year we are well positioned to execute on five clinical trials in a broad range of indications, each offering an opportunity to increase the value of our portfolio dramatically.

Before I open the call to Q&A though, I would like to take a moment to welcome some of our new investors and thank all of those that participated in our financing this past year. This capital is what allows us to drive the aggressive clinical development of our promising portfolio of product candidates. We do appreciate your support and we look forward to delivering on our promise to you in the coming year.

With that said, I would now like to open up the call to Q&A.

Question-and-Answer Session

Operator

Thank you. The question and answer session will be conducted electronically. (Operator Instructions) Our first question will come from Jaun Sanchez with Punk Ziegel.

Juan Sanchez -Punk, Ziegel & Co.

Hi, good afternoon guys. I have two questions. The first one is if you want explain the physiological rational which is included in the combination with [indiscernible] pain the fibromyalgia trials? What kind of differences do you expect to see between this group and the [indiscernible] and the second question is about cash and the option rate securities. If when ever you had opportunity to lower the securities from 28 million to $26 million, did you have the chance to mark-to-market those remaining securities as well?

Simon Pedder

Okay I’m going to take the first question, now about the second question, the rational for wanting to study Droxidopa in combination with carpidopa versus Droxidopa alone, have a lot to do with the etiology of fibromyalgia. There’s been a lot of questions of whether or not it’s a whole body disease ie; peripheral and essential components or it’s just really a central disease. By using carpidopa, which is a peripheral decarboxylase inhibitor, which would block the metabolism of Droxidopa into norepinephrine, we would be able to really drive the increase of norepinephrine levels in the brain and central components, whereby giving it in mild therapy we would be able to increase norepinephrine levels both in the peripheral and the central. You may know that there’s a great debate about the etiology and subsequently one of the things we wanted to test is just whether or not increasing norepinephrine would be beneficial. What would be the benefits of increasing it peripheral and centrally compared to just increasing it centrally and we think we’ll be able to get some evidence for that answer with the design as it is. For the second question, I’m going to pass it over to Nick.

Nick Riehle

Hi, Jaun. The option rate certificates in January all had successful options, which certainly supported the liquidity of those at year end. During the course of those, of January, we drew down on a couple of those certificates, which resolved in the lower balance as of February 15, as of currently. As you are aware, since mid-February time frame, those option certificates have been unsuccessful, resulting in our not being able to take additional amounts out at this time. So the liquidity we gained during, you know through mid-year was from successful options prior to the commencement of the option failing.

Juan Sanchez -Punk, Ziegel & Co.

Thank you.

Operator

And our next question will come from Howard Liang of Leerink Swann.

Howard Liang -Leerink Swann & Co

Yes, thanks very much. Can Simon, are ,301 and 302 are in the same clinical sites?

Simon Pedder

No, 301 and 302 are in different sites. That being said, it was planned to get 302 up and running first. There is a possibility that some of the 302 sites may in fact complete recruitment in 302 where they should theoretically become a 301 site as well. And there is a few of the bigger sites, the more substantial sites, which have already expressed an interest to actually be involved in 301 as well as 302.

Howard Liang -Leerink Swann & Co

And if you have, completed the data from 302 first will you announce that, or are you going to wait for both studies to be completed?

Simon Pedder

Well we would announce it for 302.

Howard Liang -Leerink Swann & Co

Okay, when would that be?

Simon Pedder

We would expect it to be by the end of the year.

Howard Liang -Leerink Swann & Co

And what about 301 then, would that be later then, 301?

Simon Pedder

We plan to get both 301 and 302 completed by the end of the year. 302 would be earlier most likely and if in fact the plan is to obviously try to bring them both together. But 302 has the open label extension program, so that’s why we plan to get that up and running first.

Howard Liang -Leerink Swann & Co

Okay and in terms of time line of 1504 was the internal analysis, interim look by DSMV new?

Simon Pedder

No, it’s always been planned.

Howard Liang -Leerink Swann & Co

Okay, so I think, is the time line the same as previously? I thought it was going to be earlier than…

Simon Pedder

We’ve always expressed that we would do the interim look, yes now we’re saying it’s early fourth quarter.

Nick Riehle

Clearly though, that will be driven by the recruitment for that study.

Howard Liang -Leerink Swann & Co

Okay and so your read out from the DSMV will be what? And I assume they will not tell you all the charms.

Nick Riehle

Well we won’t be getting details, but clearly they have to look at each dose of CH-1504 is safe and each dose there is an efficacy signal seen. If in fact there is not an efficacy signal seen at a specific dose or in fact there’s a fallibility issue with a specific dose, they would have the capability of stopping recruitment into that dose.

Howard Liang -Leerink Swann & Co

Okay to make sure, that was half the patients, ½ of patients have completed three month study?

Nick Riehle

That’s all planned as of now.

Howard Liang -Leerink Swann & Co

Okay great, thank you very much.

Nick Riehle

Thank you Howard.

Operator

(Operator Instructions) Our next question will come from Martin Serelli (sp) with Ellea Capital (sp)

Martin Serelli-Ellea Capital

Hi, can you hear me ok? You know I have a question on Droxidopa. There seems to be a lack of consensus on Wall Street about the potential sales generation of Droxidopa in the future. Can you shed any light on whether Droxidopa is likely to be a $50 million drug, a $100 million drug or a $500 million drug and just the NOH indication?

Nick Riehle

Well, I think that what will drive the success of the NOH indication will be how successful we are in implementing the knowledge, the benefit and the clinical safety of Droxidopa for the treatment of neurogenic orthostatic hypotension and Parkinson patients. I think the reason that all the compounds that are used in this area, specifically Mydrin is in the 50 to $60 million range, although Shire did a relatively good job in milking the compounds to an autonomic specialist. They did not do a very good job milking the compound to neurologists, especially those who see Parkinson patients. And so one of our plans has been to aggressively market this to Parkinson patients, which is a much bigger market potential and we believe that we can have several, follow improvement on the scale of such Mydrin do, which is approximately 60 million in the US.

Martin Serelli-Ellea Capital

Okay, so you don’t have a partner for 1504 yet and I guess the data is Q4 so, two quarters away or so. Is it your intention not to have a partner by that date or is it your intention to have a partner by that date? I guess taking either direction would be two very different strategic goals for the company.

Nick Riehle

Well we always talk to people and we’re not going to stop talking to people just because we’re initiating the Phase II clinical trial. We continue to also start collecting other data from our pre-clinical program, which we think is very supportive, for 1504. In fact our whole antifolate as a portfolio and it’s our kind of view point that most likely when we license this it’s not going to be as an individual drug, it will actually be as a whole portfolio. We certainly think that as we collect additional information, it will make it more attractive to possible partners and you know we’ll certainly do a deal, when we think we have an attractive deal, which is rewarding for our shareholders.

Operator

Any further questions Mr. Serelli?

Martin Serelli-Ellea Capital

No.

Operator

Thank you. And that would conclude our question and answer session. At this time I’d like to turn the program back to our speakers for any additional or closing comments.

Simon Pedder

No, I’d just like to reiterate that we appreciate the support that we have received and we look forward to giving you continual updates throughout 2008 in all our development programs. Thanks and I hope everybody has a wonderful week.

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