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Nastech Pharmaceutical Company Inc. Q1 2008 Earnings Call Transcript 3 comments

May 27, 2008 | about: NSTK

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Nastech Pharmaceutical Company Inc. (NSTK)

Q1 2008 Earnings Call

May 8, 2008 4:30 pm ET

Executives

Matthew Haines - Senior Director of IR and Corporate Communications

Stephen Quay - Chairman and CEO

Gordon Brandt - President

Bruce York - CFO

Analysts

Alex Quint - Quint Miller & Company

Bert Hazlett - BMO Capital Markets

Yale Jen - Maxim Group

Andrew Riley - Ponfit Partners

Eli Hollander - Private Investor

Presentation

Operator

Good day, ladies and gentlemen, and welcome to the first quarter 2008 Nastech Pharmaceutical Earnings Call. (Operator Instructions)

I would now like to turn the call over to your host for today's call, Mr. Matthew Haines, Senior Director of Investor Relations and Corporate Communications. Please proceed, sir.

Matthew Haines

Thank you and good afternoon. Thank you for joining today's conference call to discuss Nastech's highlights and financial results for the quarter ended March 31, 2008.

With us today are Dr. Stephen Quay, Nastech's Chairman and Chief Executive Officer; Dr. Gordon Brandt, President; and Bruce York, Chief Financial Officer. At 4 p.m. Eastern Time today, we released financial results for the first quarter ended March 31, 2008.

During today's call, Dr. Quay will review recent corporate activities. Dr. Brandt will review the insulin and PYY Phase II programs, and Mr. York will discuss our first quarter financial results. Following our formal remarks, we will open up the call to your questions.

Before we begin, I would like to note that comments made during this call may include forward-looking statements regarding future events or the future financial performance of the company. Such statements are predictions only, and actual events or results could differ materially from those made in any forward-looking statements due to a number of risks and uncertainties, including assumptions about future events based on current expectations, planned business development efforts, near and long-term objectives, potential new business, strategies or organizational changes, changing markets, future business performance and outlook. I refer you to our most recent filings with the SEC, including, without limitation, Forms 10-K, 10-Q and 8-K, which contain all material information about us, including risk factors.

I will now turn the call over to Dr. Quay.

Stephen Quay

Thank you and good afternoon. During the first quarter of 2008, we continued our corporate restructuring plan to significantly reduce cost and bring our resources into alignment with our 2008 program objectives, including advancement of our RNAi programs and completion of our Phase II clinical trials with intranasal insulin for diabetes and intranasal PYY for obesity.

As part of the corporate restructuring, we undertook a thorough strategic review of our assets and opportunities to determine how best to enhance shareholder value over the next several years. The result is a comprehensive plan to focus our efforts on developing and partnering our RNAi assets, including RNAi therapeutics delivery technology and intellectual property.

We intend to complete the ongoing Phase II trials with insulin and PYY which will be wrapping up soon. We have no current plans to take these programs or our PTH program further into development on our own. Therefore, we have engaged BMO Capital Markets as our strategic adviser to assist us in identifying a partner or partners to further develop and commercialize these programs through either a sale or licensing transaction.

Now, I'd like to have Gordon Brandt provide additional information on the insulin and PYY programs.

Gordon Brandt

Thanks, Steve. As you know, Nastech is developing an intranasal insulin designed to address a critical unmet medical need, mealtime glucose control with a lower risk of hypoglycemia. I'd like to give you some quick background information on why we think this product is so important.

The typical treatment regimen for a newly diagnosed type 2 diabetic is to start with an oral medication. Depending upon how the patient does, another medication may be added, but it can be as long as 10 to 16 years before a patient's disease progresses to the point where insulin is required. Fear of needles and a perception of "If I'm only taking pills, I don't really have a serious disease," are factors that may affect when a patient finally goes on insulin.

Once type 2 diabetics go on insulin, they usually start with a long-acting insulin to lower their average glucose levels, more commonly known as fasting plasma glucose. Long-acting insulin gets most patients to between one-half and two-thirds of the way to their target blood glucose levels, but only 8% of the patients actually attain the target. To get a larger number of patients to their goal, it's necessary to control both fasting plasma glucose and mealtime or prandial glucose.

Mealtime glucose is initially addressed with only modest success with oral medications that increase the amount of insulin released or make the body more sensitive to insulin. However, these oral medications, again, only have modest efficacy and mealtime insulin is eventually required. Regular insulin or rapid-acting insulin analogs are typically injected immediately before a meal for this purpose.

The problem with injectable mealtime insulin is that it tends to last too long in the body. This can result in low blood sugar, known as hypoglycemia, and the consequences can be disastrous. For example, if a patient passes out while driving. Indeed, the rate of hypoglycemia is six times higher an average of 12 episodes per patient per year when the patient is on the currently available rapidly acting injected mealtime insulin. For this reason, most doctors are hesitant to prescribe this critically-needed mealtime insulin.

Nastech's approach addresses this urgent medical need with a non-injectable, easy-to-use, rapid-acting nasal spray. The key attributes of our nasal spray are twofold. The insulin gets into the body rapidly at mealtime and starts working immediately with the meal. And the nasal insulin gets out of the bloodstream rapidly in 45 to 60 minutes. That means the patient does not have the likelihood of unopposed insulin action, which can lead to hypoglycemia.

An additional benefit of the rapid onset of action of our insulin nasal spray is that such rapid action mimics a natural process known as first phase insulin response. At the beginning of a meal, the insulin producing cells in a non-diabetic will release a quick burst of insulin. The purpose is to shut off glucose production from the liver, which normally produces glucose between meals. Type 2 diabetics lose the ability to secrete this rapid pulse of insulin, so they're fighting two sources of glucose, from their meal and from their own liver. The rapid action of nasal insulin decreases or eliminates that second unnecessary source of glucose.

Yet another benefit of the Nastech approach is that we designed our product to be delivered via the nasal mucosa to the blood. In our case, we should minimize or avoid any potential pulmonary safety concerns since our product simply is not designed to get into the lungs like some other pulmonary insulin technologies that have raised issues recently.

In summary, what patients and physicians need is a safe and convenient mealtime insulin that can control post-meal glucose without increasing the risk of hypoglycemia. We believe we have attained that goal with our intranasal product.

Moving to the study conduct and results, we recently completed two Phase II studies, one in Europe and one in the U.S. In response to questions from shareholders, we had originally given guidance that one study would be conducted and approximately 20 patients would be enrolled by the end of March. To enhance the rate of patient recruitment, we chose to add a second center to the study, both to increase the number of patients and to test the product in a different subset of the type 2 diabetes population.

29 patients have completed the study, with the last patient coming off April 15. The final lab results are still coming in, but given all the data I have seen to date, I'm pleased to say the product met both of its key endpoints. First, the study demonstrates that Nastech's products work as well at controlling peak post-meal glucose as the gold standard rapidly acting insulin, NovoLog. The primary efficacy endpoint was non-inferiority of the two products at 60 minutes post-meal, and we have demonstrated that non-inferiority.

The second endpoint was reduction in post-meal hypoglycemia, and we have succeeded at this endpoint as well, demonstrating a statistically significant lower incidence of hypoglycemia during the four-hour post-meal period with nasal insulin compared with NovoLog. Full results will be presented at the American Diabetes Association meeting, both in poster and oral sessions in June.

Turning our attention now to PYY for obesity, we're wrapping up a multi-center Phase II study that has enrolled 551 obese patients, exceeding our goal of 500 patients. As a reminder, this is a six-month, randomized, placebo-controlled study, comparing three different doses of PYY with placebo and Meridia, the gold standard weight loss drug in the U.S.

Weight loss is the primary endpoint, and there are a number of secondary endpoints, including metabolic syndrome, which is a collection of symptoms including high blood pressure, high cholesterol and triglycerides and elevated glucose levels. FDA has recently indicated that reduction in metabolic syndrome may be a path to approval for an obesity drug. So, this would be a potential second indication for which PYY could be approved.

At this point, patients are just starting to come off study. As I mentioned, the duration of the study is six months, and the average patient has been on a little more than five months now. We expect to report final data from the study at a scientific conference in October of this year.

And now, I'll turn the call back over to Dr. Quay for a discussion about RNAi.

Stephen Quay

Thanks, Gordon. As indicated in our recently filed proxy statement, we have proposed to change Nastech's name to MDRNA, Inc. For those who are not familiar with the term, MDRNA has a double meaning, referring both to our goal of developing a broad range of medically relevant RNA-based products and referring to RNA constructs related to our three-stranded meroduplex design, which we are evaluating as a third-generation oligonucleotide platform in addition to our more immediate focus on development of Dicer substrates as potential therapeutics.

Our goal is to leverage our cellular biology and peptide chemistry expertise and platform technologies to become a leader in the area of RNA-based therapeutics and delivery.

Over the last four years, we have developed a platform for the development of RNA-based therapeutics, both through in-licensed and internally developed technologies. These include building blocks in nucleotide chemistries to improve the properties of our siRNAs, cargoes including Dicer substrates and meroduplexes to boost both efficacy and safety. And, of course, we continue to focus on delivery using innovative and proprietary lipids and peptides.

Our initial efforts have focused on TNF-alpha as a therapeutic target for the treatment of rheumatoid arthritis and to our acquisition of Galenea in 2006, a robust program for the treatment of pandemic and seasonal influenza.

You could look for us to leverage recent advancement in our technology and capabilities in formulation development by announcing in the next few weeks to months additional internal development programs in significant disease targets and to provide guidance on the initiation of human clinical trials with systemically delivered RNA.

We believe our expertise in cellular biology and peptide chemistry gives us a competitive position in the RNAi space, with delivery technology in a patented state that gives us and our collaborators freedom to operate.

Following the filing of another 83 U.S. and European applications during the first quarter of 2008, we initiated discussions with potential pharmaceutical partners. While we are early in this process, we are pleased with the level of interest we are seeing. We hope to be able to establish one or more big pharma partnerships in RNAi during 2008.

Now, I'll turn the call over to Bruce York for a discussion of our financial results.

Bruce York

Thank you. As Dr. Quay indicated earlier, we have continued to implement the corporate restructuring that was announced in February 2008. We have now reduced our headcount to approximately 85 employees from 235 in early Q4 last year and 155 in January 2008. Approximately half of our employees are involved in the nasal and administrative sides of our business and the other half are focused on RNAi.

The size of reduction in force met the criteria of the Federal WARN Act, so employees being terminated remained on our books through April 29, including the 60-day notice period. Our first quarter loss was approximately $16.5 million dollars, partially due to a $1.9 million restructuring provision. And additionally, during Q1, we continued to fund the ongoing Phase II studies in insulin and PYY.

Let me now review the results of the first quarter of 2008. Revenue for the quarter ended March 31, 2008, was $1.3 million compared to $5 million for the first quarter of 2007. Last year's period included revenue from our collaborations with P&G and Novo and also a $2 million milestone related to a Nascobal patent issuance which was received from QOL Medical.

The 2008 period included approximately $100,000 in government grant revenue and approximately $500,000 in Nascobal manufacturing revenue. Additionally, we recognized approximately $700,000 in license and research fee revenue from our feasibility program partners.

The net loss for the quarter was $16.5 million compared to $11.5 million in the first quarter of 2007. This $5 million increase in net loss is due to a combination of $3.7 million in lower revenue, $1.9 million in restructuring reserves, lower interest income due to a combination of lower invested fund balances and reduced interest rates, partially offset by reduced overall operating expenses.

In comparison to the prior-year period, R&D expenses decreased by $2 million to $10.9 million for the first quarter of 2008. In late 2007, we initiated Phase II clinical trials to evaluate our PYY nasal spray in obese patients and our rapid-acting insulin nasal spray in patients with type 2 diabetes, a PK and safety study to evaluate our PTH nasal spray for the treatment of osteoporosis, and a Phase I study for our Carbetocin nasal spray for patients with autism, causing a related increase in R&D expenses. We discontinued our PTH clinical trial in the first quarter of 2008.

Selling, general and administrative expenses increased $500,000 to approximately $4.8 million in the first quarter of 2008 in comparison to the prior-year period, primarily due to increased patent legal expenses, partially offset by reduced personnel-related expenses, as we continued to implement our restructuring and cost-containment efforts.

We recorded a restructuring charge in the first quarter of 2008 of approximately $1.9 million comprised of employee severance and related costs of about $1.6 million, of which approximately $600,000 was paid in the first quarter with the remainder to be paid in the second quarter of 2008 and $300,000 in clinical trial termination fees related to the termination of our PTH clinical trial as previously discussed.

We ended the first quarter of 2008 with approximately $24.1 million in cash and cash equivalents and short-term investments compared to $41.6 million at the end of 2007, including $2.2 million in restricted cash at each date. Recently, in April, we strengthened our cash position with the completion of a $7.9 million registered direct financing with new and existing institutional investors.

To summarize, we have three feasibility programs in progress. These programs are fully reimbursed by our partners. We hope to receive positive results from our PYY and insulin trials, which may lead to new collaborations, and we are looking for funding to initiate our PTH BMD study.

We are resource-constrained today and must choose carefully how we spend our dollars. Our company will change dramatically this year as our focus changes. We will likely be raising additional funds and looking at innovative ways to advance our therapeutic development programs during 2008.

This concludes my comments. We will now open today's call to your questions.

Question-and-Answer Session

Operator

(Operator Instructions)

Our first question comes from Alex Quint from Quint Miller & Company. Please proceed. Sir, your line is open.

Alex Quint - Quint Miller & Company

Yes. What do you see as the value proposition for Nastech going forward with respect to both nasal business as well as RNAi?

Stephen Quay

Well, as indicated today through a fairly detailed review of the 2 clinical programs in the nasal business, we believe that there is significant value in both intranasal insulin to meet the unmet medical need of post-prandial hypoglycemia in type 2 diabetics and the ongoing trial with PYY in obesity.

We think on the RNAi side, we have one of the largest, if not the largest, collection of IP in that area and an approach to the science that's unique. And as you know, in this space, both patents and pre-clinical results are valued very highly in the market.

Alex Quint - Quint Miller & Company

Great. Another question, if you don't mind. Could you tell me please what is your competitive advantage over other companies in the RNAi space, please?

Stephen Quay

Yes, well, our competitive advantage is that we are primarily focusing on the use of something called Dicer substrates, which have been shown in both our own laboratories and at the City of Hope by Dr. John Rossi and associates who did the invention of this construct.

Dicer substrates do have improved efficacy. That is they work at lower doses than what are called RISC substrates. They also have the flexibility to allow covalent modification to assist in delivery. As you may know, delivery of RNA-based therapeutics is the primary challenge preventing the full exploitation of this technology. And the Dicer substrate, because of the way it is processed in the cell, provides the chemist with significantly greater flexibility in designing delivery tools to get things into cells.

In addition, our patent state includes a target patent portfolio where we have filed Dicer-based patents for approximately 150 of the disease-validated targets for RNA-based therapeutics.

Alex Quint - Quint Miller & Company

Thank you. One final, if you don't mind. You've indicated that you have the "freedom to operate". Could you speak further about your patent strategy as it relates to this, please?

Stephen Quay

Yes, that has been discussed in more detail in a prior webcast which I believe is still available on our website. Alnylam, which is the leader in the RNAi space, is a public company in Boston, has several issued U.S. and European counterpart patents, Tuschl I and II, Kreutzer-Limmer patents, and these patents are focused on RISC-based substrates, not on the Dicer constructs that we are using.

And so, one of the important things that we provide partners and ultimately our shareholders in value is the fact that our Dicer substrates in fact have freedom to operate with respect to the currently issued patents in the space that are RISC-based substrates.

Alex Quint - Quint Miller & Company

All right, great. Thank you very much.

Matthew Haines

Thank you.

Operator

Our next question comes from the line of Bert Hazlett from BMO Capital Markets. Please proceed.

Bert Hazlett - BMO Capital Markets

Thanks. I have a couple questions. And first, on the RNAi side. Steve, you've discussed your approach in TNF-alpha previously, and you seem to be making progress there. Without going into the details about what you might be moving into the clinic, because you'll do that a little bit later, but what therapeutic areas might make sense for projects away from the TNF-alpha target? Could you talk about that?

Stephen Quay

Yes, thanks, Bert. I think that we and others have indicated that cancer targets are probably the largest opportunity for RNAi-based therapeutics. So, that would be something that you should see us and most of the other companies in this space focusing on. In addition, certain infectious agents and other targets of inflammation other than TNF-alpha are very attractive targets for drugs in this space.

Bert Hazlett - BMO Capital Markets

And is it fair to say then that the programs that you're looking to move into the clinic will be in those areas?

Stephen Quay

That's correct.

Bert Hazlett - BMO Capital Markets

Okay. And the nasal insulin program seems to be generating some intriguing results. If you folks could just discuss a little bit further what we should expect to see at ADA and the level of discussion you might have had to date with regard to potential partnering of that. Is that something that has been done up till now or is that something that you expect to generate greater interest from based on the data presented at ADA?

Stephen Quay

Yes, Bert, I'm going to have Gordon answer those.

Gordon Brandt

Thanks for the question. The data is still coming in from the study. I got some of the data as recently as last night. So, we're not ready to present the final data on this call. Moreover, we think the best place to present it would be at the American Diabetes Association meeting.

What I can tell you is that we've had a poster that's been accepted, and we've also been invited to present our data at an oral session. The oral session will be on Saturday. I believe it's June 7th later on in the afternoon. So, we look forward to exploring this further.

Again, the key things that are needed in this area is a product that demonstrates a true medical advantage, a step forward, as well as something that's convenient that patients will allow to be used in wider use. And so, we believe that our product represents both of those things.

Bert Hazlett - BMO Capital Markets

And could you just maybe talk a little further, Gordon, as the particular vehicle that's used to affect the delivery across the nasal mucosa, has this had extensive talks of studying? How many patients has it been in, in this particular vehicle with nasal insulin?

Gordon Brandt

The two studies we just completed were 29 patients, and they were relatively short duration. They were up to 11 days in the clinic. So, that's not a big safety database. Again, with our molecular biology approach, we are looking at known pharmaceutical excipients that work through the tight junction mechanism of action as the best of both worlds.

We have found a novel mechanism of action with existing compounds that have a known safety database. So, I mean where we have our best safety data is in the PYY program where we have delivered well in excess of 100,000 doses. There are differences between one program and the next. So, I can't say that we can necessarily rely on that safety database for influence, but certainly the data that we've seen to-date suggests that this is a safe drug.

Bert Hazlett - BMO Capital Markets

Thank you. I appreciate it.

Operator

Our next question comes from Yale Jen from the Maxim Group. Please proceed.

Yale Jen - Maxim Group

Thank you, gentlemen, for taking my questions.

Gordon Brandt

Thank you.

Yale Jen - Maxim Group

Sure. The first one is regarding the RNAi assets. Recently, you have a conference talking about the patent estate of these assets, and you mentioned that the delivery is another important point for this asset to be valuable. Could you elaborate a little bit more on that and is there any sort of nuances as you move things forward?

Stephen Quay

Yes. And just for background, the therapeutics in this space are approximately 16,000 molecular weight oligonucleotides with 42 charges on their surface, and they do not intrinsically go into cells.

Yale Jen - Maxim Group

Right.

Stephen Quay

So, the key thing in delivery is not, like our nasal assets delivering across the nasal mucosa, but actually delivering it into a cell at the cellular membrane level. This problem, as it were, in this space, has been the focus of our efforts since we began, because we knew that that was ultimately the thing that would either limit or allow this to reach its full potential.

We have taken a very broad approach here using both complexes and conjugation chemistry, peptides, lipids and other kinds of chemistries to find the best delivery solution. It is apparent even at this point in time that there will be no one universal delivery solution for all products in this space for all diseases that probably there will be different delivery for individual different molecules.

Having said that, we believe that our focus on conjugation of peptides and lipids and our focus on the toxicity of lipids and ways to minimize the toxicity of those lipids has been really instrumental in us focusing on the key areas that needed achievement. And we've made a lot of progress in those areas.

Yale Jen - Maxim Group

So, would that be fair to say, as you move forward, for each specific targets, you would have sort of ready-to-go delivery, sort of machinery to go with it when you speak to the financial partners?

Stephen Quay

Yeah, that's correct. So, we've tried to treat our delivery. The delivery problem is either organ specific or tissue specific or cell specific. So, we've looked at liver models and at pulmonary models and at systemic organ models and at peripheral circulating monocytes and macrophages and circulating leukocytes and intraventricular cells as well.

So, we've tried to do the approach for a number of different tissues and targets at the delivery level, assuming that there may be more than one particular gene you want to knock down in a given organ.

Yale Jen - Maxim Group

Sure, great. I have a few additional questions. The next one is that just assuming there is a possibility there will be legal challenges for your competitors to the RNAi space, would you all contemplate any legal fund to a defense against it?

Stephen Quay

Well, again, we've done an announcement at this point in time that indicates that we have freedom to operate around all of the issued patents that are critical for what we're trying to do here. And it would be speculation to comment on legal actions that might occur in the future. We have over 300 patents and patent applications ourselves. We highly respect IP, both that we generate and that's being generated by others. So, we are operating with a clear position that we want to avoid the patent rights of others.

Yale Jen - Maxim Group

Sure. And just a quick thing about the Analyst Day, you mentioned that you will have one some time this year. And was a specific day being set?

Stephen Quay

We've had an annual analyst meeting in the fall for the last several years. And we will continue that process this year. A date has not been set.

Yale Jen - Maxim Group

Okay. And the last one is for the PYY date. Is there a specific medical conference that you can pinpoint for the data release or full data presentation?

Gordon Brandt

Yes, we have submitted data to a medical conference called NASO, the Obesity Society. Their conference is in October. We don't know that it has been accepted yet. So, I can't say that that's where we will present the data. But that's the preeminent obesity meeting in the world, and we have expectation that we will be presenting our data there.

Yale Jen - Maxim Group

Okay, great. Thanks for answering those questions.

Matthew Haines

Thank you.

Operator

Our next question comes from the line of Andrew Riley from [Ponfit Partners]. Please proceed.

Andrew Riley - Ponfit Partners

Hi. Mostly have been answered, but perhaps you could just clarify for me what the timeline is on your RNAi trials. You did say this was going to be systemic. So, presumably we're not talking about flu. Can you color that at all for me, please?

Gordon Brandt

Yeah, as I indicated in the call here over the next few weeks and months, we will be disclosing that only the targets and our plans around them. But the timing of entering the clinic, not prepared to do that today.

Andrew Riley - Ponfit Partners

Okay. This is systemic delivery, however, that we're talking about?

Gordon Brandt

That's correct.

Andrew Riley - Ponfit Partners

Okay. The PYY trial will be finished in June, I understand. Can you give me an idea how long the analysis will take, and will you share the preliminary data with potential partners or what's the strategy for moving that towards partnership?

Stephen Quay

Sure, Andrew. Actually, by the nature of the study, the patients have to come in for multiple visits, and each visit can have a certain window around it. So, indeed, it may be into early July that the last patient out of 550 is off. But your timing is not far off.

There is a follow-up call that needs to be made. The database is then locked. The trial is being conducted entirely electronically. So, the database lock will occur very, very quickly thereafter. Our goal would be to present it at a major scientific meeting. Having said that, we will continue partnership discussions with all speed. So, under confidentiality with interested partners, we would like to share data before that scientific presentation.

Andrew Riley - Ponfit Partners

Thank you.

Operator

The next question comes from Eli Hollander, a private investor. Please proceed.