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Flamel Technologies S.A. (NASDAQ:FLML)

Q2 2012 Earnings Conference Call

July 26, 2012 08:30 ET

Executives

Mike Anderson – Chief Executive Officer

Sian Crouzet – Principal Financial Officer

Analysts

Matt Kaplan – Ladenburg Thalmann

David Moskowitz – Private Investor

Peter Butler – Glen Hill Investments

Operator

Good morning, ladies and gentlemen and welcome to the Flamel Technologies’ Second Quarter 2012 Results Conference Call. After prepared remarks, we’ll be opening the call to a Q&A period. (Operator Instructions) As a reminder, this call is being recorded.

It is now my pleasure to turn the call over to Mike Anderson, CEO. Please go ahead sir.

Mike Anderson

Thank you, operator, and good morning, ladies and gentlemen. We appreciate very much your joining us today.

Before we begin, I’ll have to open with our usual forward-looking statement language, which is also included in last night’s press release. All statements made on this call about future events, results, performance, products under development, plans or objectives are forward-looking. Actual results may differ materially from these statements due to risks and uncertainties over which we have no control. We encourage our shareholders to review the risk and other disclosures set forth in our SEC filings, which are all publicly available.

It remains a period of transition and transformation for Flamel and I am happy to report that we continue to gain momentum during the past quarter, becoming a more vertically integrated pharmaceutical company, and therefore a company better able to control its own future, remains a key priority for us and we continue to believe it is our best opportunity for delivering sustainable growth and shareholder value. Partnering our world-class drug delivery platforms continues to be a key part of our strategy that our expanded commercialization capabilities are now allowing Flamel to offer even more value to shareholders as our internal projects advance towards commercialization.

For example, last month at the 14th International Symposium on viral hepatitis and liver disease in Shanghai, we shared some of the recent progress we have made on our interferon-alpha extended release program. At the meeting, we have the privilege of giving a lecture and oral presentation on some of the clinical results we have seen so far on Interferon-Alpha XL in hepatitis C patients. Interferon-Alpha XL is a long-acting interferon that utilizes our proprietary Medusa technology to offer a convenient once weekly injection for HCV infections.

And unlike the pegylated interferons on the market today, the interferon molecules in the Flamel product were unmodified and remain fully active potentially resulting in an improved therapeutic profile. We are optimistic that this unique formulation will offer meaningful advantages for patients, especially in regions like China where so many are suffering from chronic infection and may need more tolerable or convenient and affordable treatment options. An 84-patient Phase 2 study of Interferon-Alpha XL recently completed enrollment and we look forward to being able to discuss the progress of programs like this with you down the road.

Now, unfortunately, the competitive nature of our business doesn’t always allow us to reveal everything about specific products that we are developing. Sometimes, partners won’t allow those disclosures as well, but as our portfolio expands and advances, so should the visibility and clearly the value. We are still on track and expect to file at least one NDA this year meaning a newly approved product could be added to our marketed portfolio as early as next year.

During the past quarter, we also announced the addition of Steven Lisi to the management team as Senior Vice President of Business and Corporate Development building and expanding an impactful portfolio will continue to require an aggressive approach to business development. I’m confident that Steve’s extensive experience with strategic transactions and knowledge within a variety of therapeutic areas will accelerate our efforts. Acquisitions like Éclat, partnerships for our Medusa, Micropump, Trigger Lock, and LiquiTime platforms development of internal programs like interferon-alpha XL. These are all part of what we think of when we think of the new fully integrated Flamel Technologies.

At this point I’d like to bring on Sian Crouzet, Flamel’s Principal Financial Officer to discuss the financial results from the quarter. Sian.

Sian Crouzet

Thank you, Mike and good morning. As you are aware the second quarter 2012 is the first period in which we have reflected the integration of Éclat into our statement of operations. As is common in acquisitions of this nature provisional value assumptions have been applied to certain elements of Éclat’s balance sheet during the process of combing our books.

At June 30 the re-measurement of the fair value of the acquisition liabilities generated non-cash entries into the statement of operations, specifically $6.8 million of income which is presented as a separate line item and $1.9 million of additional interest expense. Given the contingent consideration by which the acquisition of Éclat will be paid, we expect to have similar non-cash income and expenses in the future as the fair value of the consideration is updated at each record date. We would look to highlight if non-cash elements going forward in order for you to understand the underlying activity.

Now in terms of revenues they amounted to $6.1 million for the second quarter of 2012 compared to $6.8 million in the second quarter of last year. This decrease was driven by fluctuations in the average exchange rate for the euro against the U.S. dollar between the two periods. Excluding the effect of currency, total revenues in Q2 2012 actually increased marginally year-over-year. As for the components of revenue, license and research revenues were $2.1 million in 2012 versus $2.5 million in the second quarter of 2011. Product sale and services were $2.1 million compared to $3.3 million in the same quarter a year ago. Other revenues in the quarter which were primarily royalty income from GSK on the sales of Coreg CR were $1.9 million versus $2 million in the second quarter of last year.

Total costs and expenses during the second quarter of 2012 decreased to $5.8 million versus $10.2 million in the year ago period. In the second quarter of 2012 this includes a $6.8 million favorable non-cash adjustment on the fair value of certain liabilities associated with the acquisition of Éclat Pharmaceuticals as I discussed earlier. Excluding this adjustment second quarter 2012 operating expenses would have been $12.6 million.

Cost of goods and services sold for the second quarter of 2012 were $1.6 million compared to $1.9 million in the second quarter of 2011. Research and development costs in the second quarter of 2012 totaled $8 million compared to $5.9 million in the year ago period. This increase was primarily due to additional $1.9 million in R&D conducted to support the recently acquired Éclat portfolio. SG&A expenses were $3 million in the second quarter of 2012 versus $2.5 million in the second quarter of 2011. This is primarily due to the $0.7 million in Éclat related expenses not present during the prior year period. Total interest expense for the second quarter 2012 was $1.7 million which increased $1.9 million of interest expense related to the passage of time on the provisional valuation of acquisition liabilities as I highlighted at the onset.

Net loss from the second quarter 2012 improved to $1.3 million compared to a net loss of $3.5 million in the year ago period. Net loss per share was $0.05 compared to $0.14 in the second quarter of 2011. Excluding the impact of the re-measurement of acquisition liabilities, net loss and loss per share for the second quarter of 2012 was $6.2 million and $0.25. With respect to cash and marketable securities, we ended the quarter with $20.2 million compared to $24.5 million at the end of 2011.

I now would like to turn the call back over to Mike.

Mike Anderson

Thank you, Sian. Our proprietary drug delivery platforms we believe continue to generate revenues and attract potential partners. Our pipeline and capabilities are expanding and our team is strong and focused. Frankly, I couldn’t be more excited about the progress that we are making and what we expect to do as we move forward.

At this point, we’d like to open up the call for any questions. Operator?

Question-and-Answer Session

Operator

Yes, thank you. (Operator Instructions) We’ll go first to the line of Matt Kaplan with Ladenburg Thalmann.

Matt Kaplan – Ladenburg Thalmann

Hi, good morning. Can you hear me?

Mike Anderson

Yes, we can. Good morning, Matt.

Matt Kaplan – Ladenburg Thalmann

That’s great, great. Thanks for giving the call today. A few questions, can you first update us on the NDA process given the sense where you are and when do you expect to submit the first NDA and could there be more than one NDA submitted in 2012 as well, part of that question?

Mike Anderson

Well, good question. First of all, as you are aware what we’ve said historically and continued to is that we are on track and anticipate, Matt, filing our first NDA in this year, that doesn’t necessarily imply that it’s at the very end of the year, but we are making good progress, and frankly, as you know there is a process by which you go through to file an NDA. You begin by filing the NDA and then FDA does a check to make sure that your application is complete and it’s generally speaking a period of time before they appraise you of the fact that they have accepted your application. The likelihood that we would have much to say before something like that to occur obviously wouldn’t be the prudent thing to do. So, we are still on track to be able to file that NDA this year and I mean we are doing good with that.

In terms of what would follow our first NDA, as you know, from the acquisition of Éclat and the material that was disseminated at that time, there are additional projects in the queue at Éclat and those projects are not all at the same point, but pretty close behind our first one. So, I wouldn’t want to go out and describe being 100% certain, it will file the second one over the course of this year, but it’s certainly possible. So, at this point in time, we are pleased with the progress of that component of our pipeline and we expect those to be contributors to our business here moving forward.

Matt Kaplan – Ladenburg Thalmann

So, what I’m hearing is you will not announce the filing of the NDA until you receive the acceptance of that filing from FDA?

Mike Anderson

I think that’s a fair way to put it.

Matt Kaplan – Ladenburg Thalmann

And you are doing that whether that in 50-day period for acceptance?

Mike Anderson

Yes, yes.

Matt Kaplan – Ladenburg Thalmann

Okay.

Mike Anderson

Typically.

Matt Kaplan – Ladenburg Thalmann

Another question, can you provide any additional details on your – I guess, internal pipeline with specific focus on the alpha interferon, interferon-alpha program. And what I’d like to see given the sense in terms of your visibility to out license that program? And then also with respect to your external partner pipeline give us an update with, I guess, with a specific focus on the interferon-beta program, that’s with Merck Serono and what other programs you can give us detail on in terms of where they are and what progress you made kind of externally as well?

Mike Anderson

Sure. Well, so let me try to take on your questions as you had posed them the first question of course related to Interferon-Alpha XL and any partnerships that we have obviously and as you are well aware of that project as of today is not a partnered project, that’s a project that we have engaged in the development for on our own. As we have also said in fairly recent past that we have a number – several ongoing and what I would consider to be mature discussions ongoing with potential partners for the licensing of that particular project. I’m also aware that a deal is not done, until the deal is done and the ink is signed and so at this point in time I think I would just have to leave it to say that we are in active discussions with actually a number of parties. And we feel very comfortable we’ll be able to find the right partner to be able to maximize the value for Flamel and of course its shareholders on the interferon-alpha XL project. So, that’s the update on that one. Second project…

Matt Kaplan – Ladenburg Thalmann

Just a quick follow-up on that.

Mike Anderson

Sure.

Matt Kaplan – Ladenburg Thalmann

We expect an ex-U.S. license on that would be the first license that you sign?

Mike Anderson

Well, Matt we really haven’t talked about the – obviously the territories would be involved since this point in time. We don’t have a partner, but I think we’ve alluded also to the fact that they are pretty robust markets internationally for this type of product. And so I think it would reasonable to assume that we are talking with people that have international expertise as well. Did I answer your question?

Matt Kaplan – Ladenburg Thalmann

Yeah, yeah.

Mike Anderson

Interferon-beta XL the Merck Serono product is a product that was I think first half talked about at the – I believe that the end of last year if I’m not mistaken and in the course of projects that we’ve been asked about a number of times over the course of 2012. Unfortunately I don’t have anything to add today of any substance. I can tell you as we have in the past that we continued to have discussions with Merck Serono on this project as it relates to appropriate next steps. This is the market as you know the MS business it’s changing very dramatically and very quickly particularly in regulated countries like the United States and the EU. So, we really don’t have much to add to that at this point in time. Although we as a company believe clearly that interferon-beta XL has value certainly in many of the markets in the world. And we fell very confident that at some point although I can’t tell you when that we’ll progress that project further and have more to say about it. I regret that we’ve not been able to add to much clarity over the past couple of months as you’re also aware Merck Serono had some issues of their own and so it’s a company in a little bit of flux itself and I think its fair to say the best sort of the complicated and made this – the progress of this project a little more difficult, but we’re continuing into work on it and just as absolutely soon as we have something to say about it one way or the other clearly we’ll do that.

The other project that is – has been disseminated in the public is the Eagle Pharmaceutical tigecyline project. And that project continues to move forward we haven’t had any updates that we put into the public domain, but you should understand that that is moving forward. And then of course we have additional projects that we’ve had that we’ll also – and they’re also continuing to move forward. Typically in a model that has that features drug delivery as you’re well aware, you would began discussions with the partner and arrangement might typically start with the feasibility agreement to determine whether or not your technology works with a specific molecule once that proof of concept has been affirmed then it typically leads to in this kind of a model a option in licensing agreement. And so it’s kind of progressed in those steps and frankly part of our new approach is to be more selective with the feasibility studies that we do. We want feasibility studies to turn into option of licensing agreement. We want that up the percentage of those kinds of feasibility agreements that lead to those conclusive agreements. And the way we do that is we can do a better job internally here and spend more energy in assessing our technology and molecules that are either in the pipeline or currently in the market that are in need of improvement as could be exhibited by our technology.

And that frankly is one of the roles that we think Steve Lisi will play. He has an excellent in-depth knowledge of disease states, of projects that in development all over the world, specific molecules and now has a great in-depth understanding of our technology. And we believe that he’ll ill be able to bring those two concepts together which should make us much more effective in our licensing and revenue activities down the road. Long answer, short question, but I felt that its important to understand that our model is changing here and we are going try to be even more effective than we have been in the past at finding the kinds of partnerships that will go all the way if you will.

Matt Kaplan – Ladenburg Thalmann

Well, thanks for the additional detail and congrats on the progress you made during the quarter.

Mike Anderson

Thanks.

Operator

Thank you. We'll take our next question from David Moskowitz, Private Investor.

David Moskowitz – Private Investor

Yes, thanks. Hi Mike, how are you?

Mike Anderson

Hey, how are you, David. Long time no talk to.

David Moskowitz – Private Investor

It has been a while. Congratulations on taking the helm, it looks like you’ve got an interesting strategy to really get this company going. Yeah, you've been the CEO for five months. Can you tell us when you took the reigns really what surprised you the most on I guess the positive side and or the negative side?

Mike Anderson

Well, that’s a great question and I had been familiar with Flamel for some time before I actually joined the company. I've always had a very healthy respect for the technology base that exist year and of course after all that is what the core competency is. And frankly – and particularly, candidly the Medusa technology I think is quite unique. And I've always been impressed and I've always felt like that is an ideal, this is an ideal technology platform its right into the changes that have taken place in healthcare. People, the idea of third party payers reimbursing for every XL form that comes down the pipe, those days are gone. They just won't do it anymore.

So, I felt like our technologies and I still do, and I found that be the case since I've been here are first class. I also felt like one other things that we needed to change was the model to reflect those changes in the marketplace. The problem with the model that has you being totally dependent upon partners is that when your partner loses interest or your partner makes some other sources arrangement or has some other kinds of issue arise, then our future and success is totally dependent upon them. So, I think the idea that we were able to – we've been able to mold some of our own ideas into our pipeline allows us to get a better handle on own future.

We no longer simply have to be dependent upon the strategic direction of partners, we can now find their own products. We can develop those products, we can marry that most difficult projects that we get from partners along with projects that maybe a little less difficult, a little less challenging and a little quicker through the development cycle. So, I guess I think this is a company that’s got loads of potential. And I think it’s just a question of re-strategizing how we want to take advantage and leverage that technology. So, that’s those in a nutshell, but.

David Moskowitz – Private Investor

Excellent. Thanks. And I know this is a little bit of a stretch to go here, but in terms of getting to profitability what can you tell us about those first two products from Eclat or anything else about the business. I mean can you give us an idea when you guys get to sort of a cash flow breakeven to profitability state? Thanks.

Mike Anderson

Yeah, well. Yeah, well that – and I think that’s an important question, one that’s at the top of our minds here. We believe that the Eclat projects, which were already well underway when this acquisition took place, will be able to contribute significantly to the company in the years ahead. And frankly if we are successful with some those pipeline projects we could conceivably just on the basis of those alone, see this be a totally different picture 18 months from now. So, I don’t think it’s going to take forever and that’s absent any of the other activities that we have ongoing. But if you’re just relating it to the acquired projects if we continue to be successful moving those through the development cycles and you think it have a meaningful impact probably sooner than probably most anticipate.

David Moskowitz – Private Investor

Excellent. And this maybe redundant, my final question but can you talk a little bit about any in licensing activities that you may have what kind of things can we be looking for from a high level strategy standpoint?

Mike Anderson

Well at this point I have to be quite candid to tell you that our real trust so far over this first 120 days has been to kind of get ourselves and get our pipeline and our development activities in line. We do have a number of in licensing discussions ongoing and we are not in a position to be able to quantify or even qualify those for you, but we’ve been very active over the last couple of months and even in the very brief period of time that Steve’s joined us we’ve continued to move forward and to build on the number of discussions that we’ve ongoing. Frankly in this marketplace today you have to have a number of discussions ongoing because overwhelming majority end up following through as you know.

David Moskowitz – Private Investor

Absolutely, that makes sense. Alright Mike. Thank you so much. Congratulations and good luck with everything and we will be looking out for your success.

Mike Anderson

Thanks. We appreciate that. Thanks for your questions.

Operator

Thank you we will go next to Peter Butler with Glen Hill Investments.

Peter Butler – Glen Hill Investments

Good morning, good morning

Mike Anderson

Hi Peter.

Peter Butler – Glen Hill Investments

Hi. As usual the second quarter that we are having the conference call on is not the most important quarter. The rule of thumb usually is what is the second quarter next year going to look like, could you give us a few guidelines what you are thinking the company might look like by mid-year next year, what major changes of what – maybe put some odds on them or in other words where are we going with Flamel?

Mike Anderson

Okay, well first of all very reticent about projecting what we’ll look like in terms of numbers a year from now. But let me start by telling you, you started this describing how second quarter is not so important. In my view and as you are aware I think every quarter is important and we are going to focus as we move forward on either becoming profitable or increasing our efficiency and our effectiveness. And we are going to try to measure that each and every quarter of year in fact we are actually doing it more frequently than that now. So, we are going to continue to drive the business forward.

I do want even though I cant I am not reticent to put numbers on but it looks like a year from now as you can understand. I will tell you that the changes that we are in the process of making the strategic realignments that we have undertaken both with respect to our internal projects and to our external discussions with partners is designed to accelerate that process to accelerate our chances of being successful with these. We have good projects in our pipeline through our revaluation of that pipeline we’ve moved to the front of our queue.

We have projects that had been for lots of different reasons prioritized differently than the way we do them today. So we focused on trying to move to different projects that would showcase our technology and projects that will help us to pay the bills. We’ve done that, it’s a continual process and we are going to continue to do that as we add new projects. We are going to monitor the marketplaces for the internal projects if we’ve put into the pipeline on a every quarter basis, if not more frequently. We want to make sure that because we look at something today and find it commercially outstanding that as we move forward with it, but it remains to be a commercial opportunity for us. So, all of those things to me are extremely important in doing it. I think it’s unrealistic to expect that this is a 30-day project or a 60 or even 90, but we hope that you will look for each and every quarter to be an improvement over the quarter before, because that’s what our focus is going to be on here.

So, if you take that as a thing, then our expectation as a company would be that as we have that, as we move half of these calls on a quarter-by-quarter basis that the results get better and better. If we are able to be successful with some of our external business development discussions and licensing, whatever they may be then that it only accelerates the process. So, we’ve become much more efficient. We are moving forward. I think, we have a sense of where we need to go and now it’s just making sure that we get there. So, that was a long answer to a short question that really didn’t give you an answer, but I hope you can appreciate that forward-looking statements. One thing….

Peter Butler – Glen Hill Investments

Let me try it a different way here. Can you tell us – can you tell your shareholders, what are the major projects on the front burner? What are your top five projects and is it reasonable to expect that you are going to ring the cash register with one of these during the next three months?

Mike Anderson

During the next – I’m not sure I know what you mean ring the cash register in the next three months?

Peter Butler – Glen Hill Investments

Well, we sign a deal that would bring some money in.

Mike Anderson

Well, again I’m not going to speculate that, that’s our objective here. And our objective is to do it as rapidly as we can. And that is to ring the cash register. As I have mentioned earlier, we have somewhat mature discussions ongoing on interferon-alpha. I don’t want to put a timetable on it, but we are hopeful that we can bring those to fruition. We have other projects that as we move forward, we might very well would expect to be able to generate additional milestones. So, we have a forecast here. We have a plan. We have expectations for revenue for business development. So forth, it’s just that we have not obviously like most every other company not publicized all of those, but again, we are hopeful that we can be able to have things to announce over the next number of quarters that will be pleasing and that will bring value and that mostly will allow shareholders like yourself to be able to see the real value that we have. And it’s my belief that – and that’s not too distant future you will be saying that you understand now. So, I think that we are well on our way to doing that.

Peter Butler – Glen Hill Investments

Well, along with Mr. Moskowitz, we are urging you on and where we are quite hopeful.

Mike Anderson

Well, thank you. We are not only hopeful we’re expectant. So, I think that between all of that, that we have a good chance to be successful here. What I really know is that we have a first class group of employees and a first class group of technologies and it’s weathering all of that correctly.

Peter Butler – Glen Hill Investments

Thank you. Well, thanks for the help today.

Mike Anderson

Thank you.

Operator

Thank you. And we’ll take our last question today from David Moskowitz, Private Investor.

David Moskowitz – Private Investor

Yeah, hi. Thanks for the follow-up. I just had one follow-on thought, sales force, you are going to need a sales force these products coming out of Éclat, what size do you think you might need and when do you think you guys are going to start the hiring process for a sales force? Thanks.

Mike Anderson

Well, David, the model has shifted a little bit today. There are projects and products that people work on and get approvals for that require sales forces. There are other projects out there that can be or you can generate the demand through other types of means. I think that as we have talked about in the past, we have no plans today to go out and hire a sales force. As our first – first, our Éclat projects for the most part we believe we can move the needle not by hiring people of our own, but by using very selected and pinpointed non-personnel selling tactics.

Today, you can do virtually anything you want that used to be five years ago was handled by a representative, you can do without one. Now, that’s not to say that we are not going to hire people, but what I’m really suggesting to you is that I don’t think you need to assume that in order to successfully market the projects that we have in that pipeline that we are going to be forced to go out and hire big sales force.

Frankly, if we feel like at the time we need some help with them then my expectation would be is that we would utilize the services of the CSO rather than going out and putting people on our own payroll. We sort of – that was part of the equation as we selected some of these products.

David Moskowitz – Private Investor

Great, thanks, Mike. I appreciate it.

Mike Anderson

Thanks a lot, David. I appreciate it.

Operator

Thank you. That will conclude our Q&A session for today. I’d like to turn the conference back over to Mr. Anderson for any additional or closing remarks.

Mike Anderson

Yes, thank you very much. Once again, we appreciate your having joined us on this call today. We look forward to future calls and to be able to continue to update you in the months ahead and we appreciate it very much and hope you have an excellent day. Thank you.

Operator

Again, ladies and gentlemen thank you for your participation. This will conclude today’s conference.

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