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Executives

Kevin Gorman - President & Chief Executive Officer

Jane Sorenson - Investor Relations

Tim Coughlin - Vice President & Chief Financial Officer

Chris O'Brien - Chief Medical Officer

Analysts

Thomas Wei - Jefferies

Ian Somaiya - Piper Jaffray

Phil Nadeau - Cowen & Company

Neurocrine Biosciences, Inc. (NBIX) Q2 2012 Earnings Call July 31, 2012 5:00 PM ET

Operator

Good day everyone and welcome to Neurocrine Biosciences Reports Second Quarter 2012 Results. At this time all participants are in a listen-only mode. Later you will have the opportunity to ask questions during the Q&A session. (Operator Instructions) Please note that this cal is being recorded and I will be standing by should you need any assistance. It is now my pleasure to turn the conference over to Kevin Gorman. Please go ahead.

Kevin Gorman

Thank you very much and welcome everyone this afternoon to our mid-year earnings call. Before I get started I would like Jane Sorenson to read our Safe Harbor statement.

Jane Sorenson

Good afternoon. I want to remind you of Neurocrine’s Safe Harbor caution. Certain statements made in the course of this conference call that state the company's or management's intentions, hopes, believes, expectations or predictions of the future are forward-looking statements which are subject to risks and uncertainties. Information concerning factors that could cause actual results to differ materially from those contained in or implied by the forward-looking statements is contained in the company's SEC filings, including but not limited to, the company's annual report on Form 10-K and quarterly reports on Form 10-Q.

Copies of these filings may be obtained by visiting the Investor Relations page on the company's website at neurocrine.com. Any forward-looking statements are made only as of today's date and we undertake no obligation to update these forward-looking statements to reflect subsequent events or circumstances. Kevin?

Kevin Gorman

Thanks Jane. I am joined here this afternoon with Tim Coughlin, our CFO; and Chris O'Brien, our Chief Medical Officer. Tim will go through the financials, Chris is going to give you a brief update on our programs and then we would be happy to take all of your questions for the remainder of the call.

I will just start off by saying that this has been a very good first half of the year for us, a good quarter, hitting all the numbers as you will see from Tim. And all of our programs continue to briskly along and more on schedule with everything, and I am really looking forward to the second half of this year. So with that said, Tim, why don’t you take us through the financials for the quarter.

Tim Coughlin

Thank you, Kevin, and good afternoon everyone listening on the call. Today we released our financial results for the second quarter of 2012 and we also have our 10-Q on file with the SEC. We met our budget for the quarter losing a penny per common share this quarter. It’s the same as the first quarter of 2012. Year-over-year we have lost $0.02 per common share for the first half of 2012 compared to net income of $0.09 per share in the first six months of 2011.

The main difference in the financial results year-over-year is due to lower income realized under the Abbott collaboration agreement. That coupled with higher R&D costs driven by increased costs in the VMAT2 program and other early research programs. We also had higher non-cash option related expense which increased by about $1.7 million from 2011 to 2012. This is driven due to the timing of option grants.

We remain on target for an annualized cash burn this year of $40 million to $45 million. Revenues for the first half of the year were $21.8 million compared to $24.7 million for the first half of 2011. The decrease in revenue is attributable to the continued transfer of our efforts around elagolix to Abbott. We expect revenue to decrease for the balance of the year due to the continued transfer of this work to Abbott, and the completion of the amortization of the upfront from Boehringer Ingelheim which occurred in June of this year.

Research and development expenses increased year-over-year and quarter-over-quarter. Year-to-date R&D expense increased $2.7 million in 2012 to $18.2 million, and this is a results of increased activity in our VMAT2 program, as well as efforts around our early stage research programs. Additionally, the aforementioned or the previously mentioned option cost, due to the timing of option grants was responsible for about $1 million increase in R&D expense. We expect our R&D expense to continue to increase for the second half of 2012 as the Phase IIb program for VMAT2 commences.

G&A expense for the quarter was moderately higher than the prior year, primarily due to higher option related expense. We expect G&A expense to continue at the current run rate for the balance of the year. Overall, for the quarter expenses were inline with our expectations and our budget, and the management team and employees of Neurocrine have continued to discipline over the company's expenditures.

We started this quarter with approximately $203 million in cash investments and receivables, and we ended with about $195 million of cash, investments and receivables. Our cash burn for the first six months for the year was $20 million, and as we previously stated, we expect the full year 2012 burn from operations to be between $40 million and $45 million.

So that concludes my prepared remarks on the financials and I will turn it back over to Kevin and Chris for the next portion of the call.

Kevin Gorman

Thank, Tim. Chris?

Chris O'Brien

Thanks, Kevin. I am going to give you an update on the programs and activities within our clinical and development groups. Obviously, elagolix is moving along under the guidance of Abbott. The big events in the last few months have been the initiation of the Phase III trial in endometriosis. As listeners know, this is a large Phase III study. 875 subjects living with moderate or severe endometriosis pain, enrolled at approximately 160 sites in Canada, U.S. and Puerto Rico. And this trial began screening approximately six or seven weeks ago and has already randomized subjects into the trial as we speak. So we are very pleased with the progress there and looking forward to that Phase III study moving along.

As the same time the Phase II uterine fibroids study is being conducted by Abbott, and as you know that program designed to assess the impact of elagolix on the rate of heavy menstrual blood loss. That program is going well and we look forward having that play out over the next few months as Abbott has outlines in their document on clinicaltrials.gov.

On our side of the equation, we have been focused intensely the VMAT2 program. As you know, and as Kevin mentioned, we had evidence of proof of concept from our 1101 study. And we are able to learn from that particular trial and put into place components that we believe are necessary for the Phase IIb study, the 1201 study. In fact this trial is moving swiftly to getting started. In fact we have our investigator meeting to kick off these activities coming up in the next few days, and we will be giving you updates as far as screening and recruitment over the next few months as this trial goes on.

It’s our intent that this trial comparing elagolix to placebo will give us the kinds of results we need next year so steer us towards end of Phase II planning for this program. I think at that point I will turn it back to Kevin and waiting to what kind of questions people might have.

Kevin Gorman

Yeah, that’s the top line on us moving forward. Again, we are real pleased with Abbott’s efforts. And we are not seeing any effects from their transformation from Abbott into AbbVie at this time in the program. They seem to be smoothly moving the program along in the Phase II and in the Phase III programs with quite a bit of resources that they are putting into it.

So at this point, why don’t we just open it up for questions?

Question-and-Answer Session

Operator

(Operator Instructions) Our first question comes from Thomas Wei with Jefferies. Please go ahead.

Thomas Wei - Jefferies

I had wanted to ask a little bit about the uterine fibroids study. I know that there had been some talk earlier on about potentially doing an interim analysis of the lower or the initial dosage that were being tested. It sounds like that’s probably not on the table and we are going to have to wait until 2013 to see the full data from that study?

Kevin Gorman

You know, Thomas, we don’t really know what Abbott’s plans are in order to share that data. We haven’t seen any of it, what I mean by sharing it publicly. I would imagine that what they may do for competitive reasons is hold off on that for some period of time to share that publicly about what we and what the rest of the investors would see as the start of a Phase of IIb program, should they get the proof of concept that they are looking for from that study.

Thomas Wei - Jefferies

Okay. And then on the Phase III trials in endometriosis, can you talk through a little bit the rationale for two dosages being tested and any details on disclosures of what those dosages are.

Chris O'Brien

Sure Tom, this is Chris. I think from Abbott’s point of view the goal was to have absolutely as one of the active dosage the dose that have been shown efficacious and safe and well-tolerated in Phase II, so the 150-milligram daily dose that we had studied extensively. The addition of a second dose was I think to fully explore sort of the range of effects that might help prescribers at the time of putting the label together and the NDA. Abbott has not disclosed that dose publicly yet, but suffice it to say it’s in the range of what we have looked at in the clinical programs and what Abbott has looked at in their clinical programs. And there is really two shots on goal.

Thomas Wei - Jefferies

And then just lastly on the VMAT program. Just an update on the next set of data and then also just a reminder of how many centers are being targeted for that study?

Chris O'Brien

So this Phase IIb study that I was referring to is approximately 35 centers, and about 120 subjects is the goal. So that our anticipation is early next year we will be able to speak to the top line results from that trial.

Operator

Thank you. Our next question comes from Ian Somaiya with Piper Jaffray. Please go ahead.

Ian Somaiya - Piper Jaffray

Just wanted to follow up on, Chris, your comment at the uterine fibroids studies going well. So if you could just elaborate on that a little bit. And then just remind us what the safety profile of the drug was? Again, going back to the elagolix Phase II endometriosis trial, was the safety profile was related to bone mineral density at 150 and higher doses?

Chris O'Brien

The bone mineral density profile in the endometriosis program was 150 milligram once daily. About 1% change in BMD from baseline. You know it’s a fairly noisy assessment tool, DXA scan. And so there is very little change that occurs during this exposure to 150 milligrams and in fact even with 250 milligrams once daily. The study that Abbott is conducting right now, as you know is a three-month treatment study. And in the three-month study that time interval is probably too short to say much about impact on DXA. So you really need to look at the six-month trial to understand that and that normally would be part of the Phase IIb initiative.

Ian Somaiya - Piper Jaffray

Okay. So that’s not a concern that investors are being mindful of just an impact on BMD coming out of the uterine fibroids study?

Chris O'Brien

Well, obviously that is -- those data contribute to what Abbott will use when they decide what to take into Phase III, do the Phase II program to identify the dosage and dose regimens that will justify a good safety and efficacy profile. So clearly they will use that Phase II data to make the decision and that will be driven in large measure by impact on bone and other safety parameters.

Ian Somaiya - Piper Jaffray

Okay. And on the Phase II, the dosage that are being [invited] in the Phase II uterine fibroids study and not disclosed, but can you just give us a sense of what the range of doses are in the trial and how they might potentially impact the outcome in terms of efficacy and safety.

Chris O'Brien

So as you state, Abbott hasn’t disclosed publicly what those doses are. And I think suffice it to say it’s a broad range of dosages looking at in a true Phase II sense of wanting to explore the dose response continuum. And then depending on dose and dose regimen, you get to pick what you want moving forward. I can only say it’s a broad range that they are looking at.

Ian Somaiya - Piper Jaffray

Are they within -- are the dosages ones that you have studied in the past, maybe through Phase I or Phase II development?

Chris O'Brien

All the dosages that are being studied in Phase II have been looked at in Phase I. Having said that, to be honest, the range of doses looked at it Phase I have been very broad.

Ian Somaiya - Piper Jaffray

Okay. And just one last question on VMAT2 program. Just the formulation that you speak to, the tablet formulation, can you just discuss or elaborate what changes were made? And is this the commercial formulation?

Chris O'Brien

So in the 1101 study, all we had was powder in a bottle. So patients came in and got the drug with some Diet 7UP everyday. The next study is capsule formulation and is a fairly simple capsule. It has -- because the drug has a long half-life and its actual design is such that the concentration time profile is what we want right out of the box, there is no special work that has to be done to get the solid dose formulation in some kind of different format, that are done with the actual drug design, the molecule design itself. So this is just simple capsule formulation, and while it certainly could serve as a commercial formulation, I guess I do reserve the right to say we plan to look at options as we go down the line. Whether a tablet might have some advantages, at the moment I don’t see one but I certainly reserve the right to pursue that.

Kevin Gorman

Yeah. And also, Ian, we have completed the relative BA study with that capsule. And so it behaves quite nicely. We have done that in humans already.

Operator

Thank you. Our next question comes from Phil Nadeau with Cowen & Company. Please go ahead.

Phil Nadeau - Cowen & Company

A couple of more on the VMAT program. I understand you correctly that Phase IIb will have six weeks of blinded against placebo and then six weeks of open label treatment following. Is that correct?

Chris O'Brien

Yes, it is Phil.

Phil Nadeau - Cowen & Company

And what's the rationale for doing it that way. Why not get 12-weeks of blinded efficacy data?

Chris O'Brien

That’s a good question. I will tell you that our concerns have been that patients with moderate or severe TD, they get very frustrated with their dis-kinetic movements. And if they are in the trial and they are not getting better, they want to drop out. So we made it very balanced decision, I would say, here of wanting to get some good dose response efficacy data over some minimum time period to be informative. But we also needed to get some long-term safety, particularly because we want to make sure we have picked up in any of the AEs that we are trying to avoid with our dose selection before we get into Phase III. And so this was the compromise that was reached.

Phil Nadeau - Cowen & Company

Okay. And what do you think for the pivotal -- what do you think the duration will need to be? Could you do it for six-week endpoint or do you think you need to go longer?

Chris O'Brien

No, I think in most neuropsychiatry venues for chronic drug use, 12-weeks is the duration preferred by the FDA.

Phil Nadeau - Cowen & Company

Okay. Second set of questions is on the Phase IIa trial site that seemed to be little funky. Have you learned anything new about what happened at hat trial site and more specifically, has anything from the conduct of that trial site informed the design of the IIb and the monitoring you are going to do?

Chris O'Brien

Yeah, in fact the second half of your question is the key learning. There are a lot of things that we have taken into account and built into the Phase IIb trial, specifically because of what we learned in the Phase IIa study. So let me give you an example of some of those things. First thing and probably one of most important, is that only subjects that have moderate or severe TD as determined by an external grader, will be allowed in the trial. And important to that is, often times in these trials, particularly if you have investigators that they know their own patients, they have been their treating physicians for a while, they tend to remember more than score their observation. And you tend to get some inflation of baseline scores and perhaps subjects get enrolled that actually shouldn’t have even been in the trial, because they didn’t really meet the moderate or severe threshold.

And so by having a videotaped structural neurological examination, generating a videotape that’s securely held on a secure server allows our professional, external [ AIMS graders] to determine whether the subjects actually should be in the trial. Now, having said that, we use that for eligibility but we actually want to stay very close to the idea of the AIMS assessment done on site. So the actual scoring of the AIMS, not the inclusion exclusion but the actual scoring of the AIMS, is done by an independent rater at the site. We know that that dynamic range of the AIMS is better when scored live but rather than having this done by the treating physician investigator, we are having an independent rater do the actual AIMS score. That rater has no other interaction with the subjects in the trial. They are not talking to them about their side effects or their medical problems or psychiatric state. They are just doing the AIMS. So they truly are an independent rater.

While that’s going on, we are also videotaping and monitoring the conduct of the AIMS exam to make sure that they continued to be done well. Furthermore, at the investigator meeting, all of the raters involved in this project have to go through an extensive and then certification process with actually a live subject showing dis-kinetic movements and scoring and an independent adjudication process for certification. So it’s a very robust process that’s been built into place.

Kevin Gorman

And just to be clear there is that inclusion into the trial is going to be done in real time through videotape by an independent rater. Each of the 35 sites will have two physicians at each site. One that takes care of the patient is the caregiver. The second one’s only interaction with the patient is to do the live onsite AIMS scoring. Those two things plus the enhanced training of those investigators, those three things should take care of anything that we saw within our Phase IIa study.

Operator

(Operator Instructions) Our next question comes from (inaudible) with Roth Capital. Please go ahead.

Unidentified Analyst

Just on the elagolix, just I would like to see, is the second Phase II will be remained scheduled by Abbott to start it next year -- I am sorry, Phase III study, endometriosis.

Chris O'Brien

Yes.

Unidentified Analyst

Okay. And for the VMAT2, it would be a bipolar study scheduled for the fourth quarter of this year to start?

Chris O'Brien

Yeah, that’s what we are shooting forward in the process of refining that protocol as we speak. But the goal would be to get to screening sometime towards the end of Q4.

Unidentified Analyst

And lastly, would the change of things in Abbott towards the end of the year, do you see their work has -- could that be impacted on in terms of those two studies? Or you feel they are pretty up for it?

Kevin Gorman

I think they are very up for it. I can tell you the team that’s on elagolix is solid, enthusiastic. In fact I was just meeting with them yesterday. They are not moving buildings, they are not changing their team. They are adding team members. And this is a very important program for AbbVie, so I don’t think you will see any disruption.

Operator

Thank you. Our final question comes from Robyn Karnauskas with Deutsche Bank. Please go ahead.

Unidentified Analyst

Hey guys, [Suvit] here for Robyn. Just a couple of quick questions. So on the VMAT trial, it looks to me like there is a slight kind of shift in the timelines a little bit to make the readout an early 2013. Just kind of wanting to get your comments on that and determine what the kind of the rate limiting steps were? And just wanted to reconfirm on uterine fibroids, if the readout is expected sometime around November, December? And just going to your early stage programs, just kind of wanted to get your views on some programs that you see most promising within the line like the current programs that you have in the market right now.

Kevin Gorman

Okay, so taking those in order. On the VMAT, yeah, you are correct, we updated our guidance after that Phase IIa trial when we saw that we needed to build more rigor into the program in order to make sure that none of the problems that we are seeing in that Phase IIa could be seen in the Phase IIb. So that added about two months to the timeline there. And we are right on track with that new timeline now going forward.

As far as the Phase II study or the uterine fibroids, Abbott last quarter updated on clinicaltrials.gov that they saw a completion of that trial happening in the springtime of next year. So that’s their update on that study. And as I said, whether we see a readout or not from that study, I really can't say. The bottom line is going to be seen in the start of the Phase IIb program in uterine fibroids out of Abbott. Then we can all know that it was a successful proof of concept or not.

And then, third, when it comes to the rest of our pipeline, we don’t really usually talk a whole lot about research pipeline and what's in preclinical because thing drop out and new things come in. We always have approximately 8 programs ongoing at any one time. We obviously specialize in neurology on all of these programs. And we are moving a couple of them through pre-clinical out of research now. I am hopeful that before year-end we will start talking about one or more of those programs as they move closer to the clinic. But there is usually at least 8 that we have actively ongoing in here.

Operator

Thank you. We have no further questions so I will turn it back to Mr. Gorman for any closing remarks.

Kevin Gorman

Thanks a lot. So in closing I will just say I am very pleased with the quarter that we just closed down on. There is a lot of activity going on here at Neurocrine and at Abbott, and that activity that is going on really does set us up for an exciting second half of this year. And so we are looking forward to meeting with you all in the conferences in the fall and throughout the winter. So thank you very much for participating today and we will be in touch.

Operator

This concludes today's program. We do appreciate your participation, you may disconnect at any time. Have a great day.

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