Neurogen Corporation Q4 2007 Earnings Call Transcript

Neurogen Corporation (NRGN)

Q4 2007 Earnings Call

March 17, 2008 8:30 am ET

Executives

Elaine Dodge, Director of Investor Relations

Stephen R. Davis, President & Chief Executive Officer

Kenneth J. Sprenger, M.D., M.B.B.Ch – Vice President, Clinical Development and Operations

Analysts

Katherine Xu - Credit Suisse

Kim Lee - Pacific Growth Equities

Presentation

Operator

Welcome to the year end 2007 Neurogen Corporation earnings conference call. (Operator Instructions) I would now like to turn the presentation over to your host for today’s call Elaine Dodge, Director, Investor and Public Relations.

Elaine Dodge

Our fourth quarter and year-end 2007 financial results news release was issued this morning. And it’s posted in the Investor Relations section of our website www.neurogen.com for your convenience. This conference call and the webcast will be available for replay after the conclusion of the conference call. Please see the news release for details on that.

I’d like to take just a minute to point your attention to Neurogen’s Safe Harbor statement as included in today’s news release. Please note that information in the release and in this conference call may contain forward-looking statements that involve risks and uncertainties. Please reference Neurogen’s SEC filings for complete information regarding these risks.

Presenting this morning is Steve Davis, President and CEO of Neurogen who will discuss 2007 results and cover the financials. Then we’ll open the call for questions. Ken Sprenger, Vice President of Clinical Development and Operations is also here this morning to help answer questions.

At this time, I’ll turn the agenda over to Steve.

Stephen R. Davis

This morning I will offer a few brief remarks regarding our operational performance during 2007, and then I’ll turn to 2008 and the future.

We executed on plan during 2007 and that together with the restructuring of the company last month has positioned us for important clinical data flow during 2008. The restructuring, of course, allows us to focus on moving our clinical development programs forward and we plan to report important clinical results from our portfolio this year.

In 2007, we advanced the ball substantially in our Insomnia Program with that adipiplon, our GABA alpha-3 partial agonist. In June of last year, we announced the results of two Phase 2b clinical studies where we examined adipiplon in sleep onset and sleep maintenance in chronic insomnia patients. We were pleased that adipiplon reached statistical significant results for the primary endpoints of both studies that is for sleep onset and maintenance.

We were also excited to see that as previously observed in Phase 2a, patients on study drug reported positive sleep quality with strong statistical significance. So, this statistical assessment was consistent with reports we received from investigators indicating that adipiplon appeared to produce a very strong response on sleep quality when patients reported how they felt the next morning.

And as you may recall from our previous discussions, one sleep expert, Alan Lankford, reported at our sleep panel discussion last fall that he has conducted 100 sleep studies and adipiplon is the only drug he has tested where the morning after taking the drug patients sought out the clinicians and, prior to being asked, reported that they slept great and felt great.

Dr. Lankford reported that this happened in both studies he ran for us and that it happened at both sites that he runs. These reports were consistent with reports from other investigators.

During 2007, we executed the initial phase of our medical education plan for adipiplon, presenting clinical data for the first time at both the American Psychiatric Association and Associated Professional Sleep Societies annual meetings. Later in the year we also presented at the Society for Neuroscience. I’ll touch on our plan forward with adipiplon in just a minute.

In our VR-1 based drugs program with Merck, the research portion of the collaboration concluded as planned in August of last year.

In November, we announced that Merck is planning to take the proof-of-concept compound MK-2295 or the compound that we previously referred to as NGD-8243 forward in exploratory studies for the treatment of cough associated with upper airway disease, and is focusing on a back-up compound currently in preclinical development, for pain. Merck is currently conducting confirmatory studies in preparation for this work.

In our Parkinson’s disease and Restless Legs Syndrome programs with our D2 partial agonist, aplindore during 2007, we worked to scale-up the clinical trial materials needed to begin Phase 2 trials which I’ll discuss in a bit.

In our obesity program with MCH antagonist NGD-4715, we announced results earlier this year from our Phase 1 multiple ascending dose studies, and based on the results of these MAD studies, we decided not to advance the compound in the Phase 2 testing at this time, but will consider out-licensing our MCH program for potential development with a partner.

So having completed these goals in 2007, the stage has now been set for an eventful year in 2008. As we announced last month, we intend to pursue multiple unpartnered clinical programs in 2008 to address anxiety, insomnia, restless legs syndrome, Parkinson’s disease and schizophrenia. And as I’ve mentioned over the next 12 months, we expect to generate important data across this broad portfolio.

Let me run briefly through the pipeline. In our Insomnia Program, we plan to advance adipiplon into a Phase 2/3 side-by-side study with Ambien CR. This will be a cross-over study designed to further define the clinical and commercial profile of the drug and we expect results from this study to be available around year-end.

Let me take just a second to remind you that adipiplon has a novel profile that’s different from currently marketed GABA insomnia drugs and from drugs in development for the treatment of insomnia. A partial GABA agonist with preference for the alpha-3 subtype receptor. And in addition to our own work associating sleep promoting effects with alpha-3 subtype, the activation of this subtype and its association with anxiolysis is well understood.

We believe that anxiolysis associated with alpha-3 may be one of several important differentiating features for adipiplon. We know that the role of reducing anxiety helps promote sleep and this has been explored by sleep experts at the Insomnia Investor Focus Meeting we held in September that I referred to you just a second ago.

In studies conducted to-date that include over 600 subjects, adipiplon in short appears to provide better efficacy than existing insomnia drugs. And we’ve identified several potential differentiating features of adipiplon that could give us an advantage in the marketplace.

These include improved efficacy for sleep onset and maintenance and improved patient assessed quality of sleep and next day well-being overall, an anxiolytic profile to break the cycle of pre-sleep worry in many insomniacs, and a wider therapeutic index, and we’ve observed at this point no adverse taste.

A side-by-side study planned with Ambien CR will enable us to establish more fully the target product profile for adipiplon. We plan to use 9 milligram and 6 milligram doses of adipiplon bi-layer tablets which include both an immediate release component and a controlled release component.

This study will be a four-way crossover study in least 60 patients with chronic insomnia. The total number of treatments we will be looking at therefore will be at least 240, meaning 60 patients with four treatments each. The treatment periods will include adipiplon, as I mentioned at 6 to 9 milligrams plus a 12.5 milligram dose of Ambien CR as a comparative positive control and then of course placebo.

The outcome measures from the study will be outcome measures measured by polysomnograms of total sleep time, latency to persistent sleep and wake after sleep onset. In addition, we will do the usual next day assessment of cognitive deficits for example, the DSST or the Digit Symbol Substitution Test.

Because how the patient perceives his or her sleep experience is paramount in the long-term success with insomnia therapeutic. We will also look at sleep quality, depth and restorative nature of the sleep. And in addition, we will make assessments throughout the next day of general performance, well-being, mood and other measures of satisfaction with treatment.

As I mentioned earlier, we feel like these subjective measures, the next day of how a patient feels is particularly important. So the side-by-side study will be looking at both these subjective as well as objective measures that doctors and patients want to see in a good sleep patient.

Turning to our Parkinson’s disease program with our D2 partial agonist aplindore, we announced the start of this study last month in Parkinson’s. It’s a Phase 2 dose ranging randomized double blind and placebo-controlled, multi-center study. It’s a parallel design study where we’ll explore the safety, tolerability, efficacy and pharmacokinetics of aplindore in patients with early stage Parkinson’s disease.

The study will include up to five cohorts of eight patients each, who will receive two weeks of treatment, with doses of aplindore administered twice per day.

In our Restless Legs Syndrome Program with aplindore due to partial agonist, we also announced the start of an RLS study last month. This trial is a single blind placebo-controlled multi-center crossover study and here we will be looking at the efficacy and safety of three doses of aplindore administered once per day for at least three nights compared to placebo.

Primary endpoint will be the number of periodic limb moments per hour of sleep for patients receiving aplindore versus those taking placebo. We intend to explore additional subjective outcomes and sleep measures in several secondary endpoints. We expect up to 24 adult patients with RLS to participate in this study.

So, as I have mentioned before, and earlier on this call, we are expanding our GABA-based clinical program into anxiety disorders, capitalizing on our recent primate studies indicating anxiety relieving effects at doses substantially lower than those producing other effects such as sedation.

And just to take a little bit of a running start at this and back-up for a second, I’d like to remind you that the results from the testing in primates which we sponsored last year. And in this study, we took NG2-83 which is the back-up to adipiplon and mechanistically identical to adipiplon into a primate anxiety study conducted at an academic institution.

There were two very important results from this study. One, we learned that the compound achieved anxiolytic activity with a profile the study investigator stated was equivalent to that of the benzodiazepines.

And second there was a much wider window between anxiety relieving effects and behavioral impairing effects that are typically seen with the benzo such as ataxia and sedation.

And for example and this study investigator also tested one of the benzodiazepines and absorbed about a 10 fold separation which he characterizes as about the best you see with the benzos. The 10 fold separation between anxiolytic effects and behavioral impairing effects and with Neurogen’s compound he observed a 100 fold separation, so we’re very excited about the prospects here.

I should also mention that in addition to potentially being less impairing than the benzos, adipiplons partial agonist profile could represent a safer drug with less overdose potential.

So to be clear, after a certain point, the receptor occupancy flattens out, and you can keep administering more drug, but the efficacy in vitro testing that we measure flattens out above a certain level, and you can keep administering more drug, you won’t get any additional pharmacology. And as I’ve mentioned, we’ve seen robust efficacy in insomnia and in the animal models, we’ve seen robust efficacy on anxiety at levels below which the curves flatten out.

So, in addition to potentially being less impairing than the benzodiazepines, adipiplon’s partial agonist profile could also as I’ve mentioned represent a safer drug. So to sum up the opportunity we are seeing in anxiety, adipiplon could achieve efficacy that meets the gold standard of the benzo’s, but with a cleaner side effect profile. So, in another words, we believe we may have a safer, more selective compound where there is an opportunity to do in anxiety what Ambien did in insomnia.

As you may recall from our previous discussions and of course before Ambien in insomnia you had the benzodiazepines, which were used extensively and by being more selective in having a cleaner profile Ambien greatly expanded that market and we think there may be a similar potential with adipiplon in anxiety.

We plan to initiate an exploratory proof-of-concept clinical study in a model of anxiety with adipiplon by the middle of this year and report data by the end of the year. In this study, anxiety will be induced in healthy volunteers by administering 7.5% carbon dioxide which simulates a feeling of suffocation.

This type of model has been used extensively in panic in the past and has been adapted in recent years for use in Generalized Anxiety Disorder. The model is now well validated with benzodiazepines and with SSRIs and the primary objective of this study will be to measure anxiety relief as well as to explore an appropriate dose range.

As I mentioned earlier this study will use doses of adipiplon that are well below those that we’ve been examining for insomnia. We expect to enroll approximately 24 subjects in this study.

We also plan the expansion of our GABA program in schizophrenia based upon growing evidence linking GABA modulation with cognitive enhancement in schizophrenia patients. Today the symptoms of schizophrenia are characterized in three ways, that is positive symptoms or a psychotic episodes, and negative symptoms which are characterized by social withdrawal and cognitive deficits.

Current anti-psychotics treat the positive symptoms and to a lesser extent the negative symptoms, but there is nothing today approved to treat the cognitive deficits in schizophrenia. We think this is a very significant unmet need and a very attractive potential market opportunity.

Over the last few years, there has been a substantial increase in the published literature suggesting that selective GABA agonists will have a positive effect on the cognitive deficits in schizophrenia.

The evidence indicates that in schizophrenia there is an under-stimulation of the GABA receptors on the neurons in the brain responsible for processing information in the cortex that is the section of the brain that plays a key role in memory, attention, thought and language. Additionally neurons in the subcortex are also affected and neurons in this area are responsible for the gating of extraneous information.

It’s believed that these deficits of both the cortex and the subcortex maybe responsible for the deficits of cognition and executive function exhibited by schizophrenic patients. The evidence goes further to suggest that GABA agonists that are selective for alpha-2 and alpha-3 subtypes which are localized in these areas of the brain, and in particular a partial agonist as is adipiplon may be useful in reversing these deficits.

So, in this area we plan to initiate an exploratory proof-of-concept clinical study that is in schizophrenic patients with adipiplon during 2008 and hereto to we expect to have the results by the end of the year.

At this point, I’ll turn to our financial results for 2007. For the year, we recognized a net loss of $55.7 million or $1.33 per share on 41.9 million shares outstanding. This compares to a net loss of $53.8 million or $1.55 per share on 34.8 million shares outstanding at the end of 2006.

The increase in net loss reflects the impact of increased spending on our clinical and preclinical drug development programs. As we reported our cash and marketable securities at the end of 2007 totaled $42.6 million.

Operating revenues for 2007 increased to $15.4 million from $9.8 million for 2006. This increase for the 12-month period is due to accelerated recognition of revenue from our VR-1 collaboration with Merck. And as we’ve noted the research portion of that collaboration concluded in August 2007 resulting in the acceleration of previously deferred revenues.

R&D expenses for 2007 increased to $61 million from $55.9 million for 2006. The increase in R&D expense is mainly due to increased spending in our proprietary clinical and preclinical drug development programs.

G&A expenses for the year were $12.8 million, compared to $11.6 million in 2006. This increase is due mainly to increases in legal patent and administrative services expenses. Looking at guidance for 2008, we are projecting an annual burn rate in the mid to high $40 million range with a net loss per share in the range of $1.15 to $1.25.

Before we go to Q&A, I would like to thank Bill Koster, who retired, as I think everyone on this call knows as Neurogen CEO, last month and I’d like to thank Bill for his contributions to Neurogen.

We’ll be pleased to answer any questions that you may have.

Question-and-Answer Session

Operator

(Operator Instructions) Our first question comes from the line of Katherine Xu - Credit Suisse.

Katherine Xu - Credit Suisse

Stephen, I was just wondering with regards to the Phase 2/3 study of Ambien versus, or adipiplon versus Ambien CR there’s the four-way cross over, what is the treatment period, length of the treatment.

Stephen R. Davis

I’ll let Ken Sprenger elaborate, but the treatment period, there will be a couple of nights in the sleep lab on drug, and it will average that and that is the same paradigm that we used in the crossover study we did previously.

Kenneth J. Sprenger, M.D., M.B.B.Ch

Two nights for each exposure for each drug that they are exposed to a placebo, and then a washout period of at least five days before the next one.

Stephen R. Davis

And that would be typical of crossover studies of this nature.

Katherine Xu - Credit Suisse

Any conferences that you are going to present at in 2008?

Kenneth J. Sprenger, M.D., M.B.B.Ch

Yes, we have a paper at the APA in May, which in fact, is some of the primate data that Steve had mentioned earlier. And we also have a couple of posters at the APSS in June.

Operator

We have a question from the line of Kim Lee - Pacific Growth Equities.

Kim Lee - Pacific Growth Equities

Quick question on your financial guidance and going forward, where do you expect R&D to fall based on levels from Q4?

Stephen R. Davis

Our R&D total spending for the year will be less than it was for 2007, and we expect that as I mentioned earlier on the call, we’ll be doing more in this year than we did in 2007 in the clinic, but be obviously burning less. We expect R&D expenses for the year for the 12-month period, Kim, to be in the vicinity of $50 million.

Kim Lee - Pacific Growth Equities

And SG&A will be about at the same levels as last year?

Stephen R. Davis

SG&A will be lower than that. And that will probably be in the $8 to $10 million range.

Operator

There are no other questions at this time.

Stephen R. Davis

Let me just sum-up by saying as we’ve discussed, we expect a lot of news for this year. We’ve got a very full portfolio, as we’ve discussed we’ll be very focused on the clinical development portfolio, and producing what I think will be very important data across the entire set of programs that we have. So, thank you very much for dialing-in and we’ll look forward to keeping you posted as we progress throughout the year.

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