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Keryx Biopharmaceuticals, Inc. (NASDAQ:KERX)

Q1 2008 Earnings Call Transcript

May 12, 2008 8:30 am ET

Executives

James Oliviero – VP, Finance

Michael Weiss – Chairman and CEO

Analysts

Jonathan Aschoff – Brean Murray, Carret & Co.

Matt Kaplan – Punk, Ziegel & Co.

Philip Nadeau – Cowen and Co.

Operator

Good day and welcome to the Keryx Biopharmaceuticals investors conference call. Today's conference is being recorded. (Operator instructions) Towards the end of the conference call, there will be a session where you can ask all of your questions.

Now, at this time, I would like to turn the conference over to Mr. James Oliviero. Please go ahead, sir.

James Oliviero

Thank you. Good morning, and welcome to our conference call regarding Keryx Biopharmaceuticals' first quarter 2008 financial results. I am James Oliviero, Vice President of Finance at Keryx, and I welcome you to our conference call today. Following our Safe Harbor statement, I will provide a brief overview of our financial results for the first quarter of 2008. I will then turn the call over to Michael Weiss, Chairman and CEO of Keryx, who will provide an overview of events which occurred during the first quarter; the ongoing clinical development of Zerenex, our phosphate binder for the treatment of hyperphosphatemia; and our lead oncology product candidate, KRX-0401, also known as Perifosine, as well as other clinical and business developments and what investors should expect from us for the remainder of 2008.

Before we begin, I would like to remind everyone that various remarks that we make about our future expectations, plans and prospects constitute forward-looking statements for purposes of the Safe Harbor provisions under the Private Securities Litigation Reform Act of 1995. Keryx cautions that these forward-looking statements are subject to risks and uncertainties that may cause our actual results to differ materially from those indicated. Factors that may affect Keryx Biopharmaceuticals' operations include various risk factors and uncertainties that can be found in our SEC filings. This conference call is being recorded for audio rebroadcast on Keryx's website, www.keryx.com, where it will be available for the next 15 days. All participants on this call will be in listen-only mode. The call will be followed by a brief Q&A session.

Now I would like to briefly discuss the financial results for the first quarter, as well as the company's overall financial condition. Our first-quarter financial results were released Friday evening and can be viewed on the "Investor Information" section of our website at www.keryx.com.

The net loss for the first quarter ended March 31, 2008, was $34,536,000, or $0.79 per share, compared to a net loss of $21,813,000, or $0.50 per share for the first quarter in 2007, representing an increase in net loss of $12,723,000. The increase in net loss is primarily attributable to costs associated with the cessation of our development of Sulonex. Such costs included an $11,037,000 non-cash impairment charge related to the write-down of the assets of the Sulonex manufacturing suite to their estimated fair value, and a $2,063,000 provision for estimated costs relating to the required restoration of the manufacturing facility to its original condition; partially offset by a decrease of $2,264,000 in non-cash compensation expense, primarily related to stock options and restricted stock previously issued to our President, whose employment was terminated as part of our restructuring. The increase in net loss also included a $1,811,000 impairment charge related to our investments in auction rate securities due to their current lack of liquidity.

At March 31, 2008, we had cash, cash equivalents, investment securities, interest receivable and license receivable of $47.6 million, as compared to $64.7 million at December 31, 2007. In April, 2008, we received a payment of $8 million that was classified as a license receivable at March 31, 2008. The payment was made pursuant to the September 2007 licensing agreement among Keryx and JT/Torii.

As I stated earlier, we recognized a $1.8 million impairment charge during the first quarter, which reduced the fair value of our auction rate securities from $12 million to $10.2 million due to their current lack of liquidity. These securities have continued to fail auctions since February, 2008. The $10.2 million of auction rate securities is included in our $47.6 million of cash, cash equivalents, investment securities, interest receivable and license receivable at March 31, 2008.

Accounts payable, accrued expenses, and accrued compensation at March 31, 2008, was approximately $17.9 million, and was primarily related to the completion and shutdown of the Sulonex clinical program and restructuring costs.

I will now turn the call over to Michael.

Michael Weiss

Great, and thanks, James. Thanks, everyone, for joining us this morning. The first quarter of 2008 was obviously a challenging one for the company, probably the most challenging for us since I joined the company in late 2002. On March 7, we announced that our former lead drug candidate, Sulonex, had failed to meet the primary efficacy endpoint in its Phase III clinical study; and that on March 27, following the receipt of a review of an interim analysis of the Phase IV study, the company made the decision to shut down the ongoing Phase IV study. While this is a major setback for the company, we acted swiftly and decisively to take action to reduce costs and redirect the team's efforts to the programs and opportunities that we believe have the best chance to yield shareholder value.

On April 4, the company announced the implementation of our strategic restructuring plan, which included the decision to terminate and/or delay several ongoing drug development programs, cease business operations, and divest assets at our San Francisco and Memphis locations, and at the company's manufacturing suite, which was built to support the potential commercialization of Sulonex. The restructuring included a workforce reduction of approximately 50%, which included the elimination of the position of President, previously held by Dr. Craig Henderson, who, since 2004, provided the dedicated service to the company.

In summary, following the restructuring, the focus for our drug development efforts will predominately be shifted towards the clinical advancement of Perifosine and Zerenex, each of which are currently in Phase II clinical development. We also plan to aggressively seek to augment our current pipeline with the acquisition of additional product opportunities while also exploring potential partnerships, alliances, or strategic relationships surrounding our current portfolio.

Let me now discuss where we are and where we plan to go with both Zerenex and Perifosine, beginning with Zerenex, our phosphate binder currently in Phase II clinical development. Let me first start by discussing a little bit about the background of the U.S. phosphate binder market, for which Keryx is developing Zerenex. Currently, estimated sales in the U.S. market are nearly $600 million. Both prescription volume and sales are growing, the latter by approximately 28%. The market is expected to experience continued growth as a result of the increasing prevalence of patients with ESRD on dialysis and the increasing prevalence of diabetes, a key risk factor for kidney disease.

The U.S. phosphate binder market is a competitive one, comprised of several therapeutic options. Nephrologists express moderate satisfaction with current treatment options and support the need for new products, especially those that can improve safety, tolerability, and patient compliance. Based on our preliminary market research, we believe a non-calcium, non-polymer compound, such as Zerenex, would be well-received. Zerenex, we believe, could differentiate itself in a number of ways. First, the compound is composed of iron plus a salt of citric acid. Nephrologists express comfort with both components as they are familiar with the materials. The lack of calcium component or a polymer has been well received in our market research conducted to date. The use of an iron compound in the ESRD population has the potential to be a positive if absorbed, given the incidence of anemia. Also, citric can serve as a buffer, decreasing the potential for metabolic acidosis, which can occur with the other products.

Second, iron enables the exploration of several different dosage formulations, which could offer greater palatability and convenience for patients, potentially supporting greater patient compliance. While we have not given guidance on which formulations we are considering, we believe we will be competitive and should hopefully have an advantage as a result of more preferred dosing options.

The three Phase II studies conducted to date with Zerenex have established a preliminary efficacy, safety and tolerability profile. In each study, collectively evaluating approximately 175 patients, Zerenex statistically significantly reduced serum phosphorus levels and was well-tolerated. We believe the results of these Phase II studies support the development of Zerenex.

In addition, to support the Phase III development of Zerenex, we are conducting high-dose animal tox studies, in a 28-day, open-label multi-centered, dose-ranging human high-dose safety study. The clinical program will be conducted by the Collaborative Study Group and is expected to enroll up to approximately 48 ESRD patients. The goal of the study is to show that we can safely administer doses of Zerenex in excess of 6 grams per day, the highest dose tested in previous clinical trials. The study has now been initiated, and we expect to complete the study before the end of the year.

On the partnership front, during the third quarter of 2007, we announced our licensing arrangement with Japan Tobacco's/Torii Pharmaceuticals for the Japanese rights to Zerenex. We believe this collaboration validates the need and potential for a novel phosphate binder with the attributes of Zerenex. Pursuant to the agreement, JT/Torii will pay to Keryx up to $100 million in upfront license fees and payments upon the achievement of pre-specified milestones, including approximately $20 million in upfront payments in near-term milestones that have now been received, which includes the achievement in the first quarter of 2008 of an $8 million near-term milestone.

Now, let me turn to Perifosine. A large part of our refocusing of operations has impacted our oncology development program. And as a result of the restructuring, we have terminated approximately 12 of 20 early-stage clinical studies of Perifosine and made the decision to delay the commencement of a Perifosine renal cell carcinoma Phase III trial until additional data are accumulated and analysis from ongoing exploratory studies of Perifosine can be completed. We believe this was the prudent decision given the cost and expense of Phase III testing and the very complicated and changing treatment landscape for renal cell carcinoma.

Let me discuss the renal cell carcinoma and multiple myeloma in a little more detail, starting with renal cell carcinoma. With the approval of the first mTOR inhibitor, Temsirolimus, for the treatment of renal cell carcinoma; and the second approval for RAD001, another mTOR in renal cell carcinoma expected soon, the importance of the Akt mTOR pathway in the treatment of renal cell carcinoma has now been established. It's probably no coincidence that the most interesting single agent activity we have seen to date with Perifosine is also in the treatment of renal cell carcinoma. We believe this observation is very encouraging as it provides additional evidence of the importance of the Akt mTOR pathway in renal cell carcinoma, and provides indirect evidence of the importance of Akt inhibition for the efficacy of Perifosine.

We are excited about Perifosine in renal cell carcinoma, and believe an Akt inhibitor may prove more efficacious than an mTOR inhibitor. It is generally believed that the higher up on a particular pathway you are able to intervene, the better and broader the activity of the intervention. mTOR, as many of you know, sits below Akt in the pathway. Intervention targeting at the highest level of these pathways, the receptor level, for example, HER2 new, EGFR, VEGF, have all been very successful. Thus, we believe Akt inhibition above mTOR in the pathway offers great potential for enhanced efficacy.

Additionally, published data has also shown that inhibition of mTOR can lead to the activation of Akt, potentially reducing the effectiveness of an mTOR inhibitor. So we believe targeting Akt is a fruitful place in which to focus our research, and the fact that mTORs have been approved in this indication serves to validate the pathway for such additional drug research. We believe Perifosine may be useful as a single agent or in combination with mTOR or other approved agents for renal cell carcinoma, and we plan to explore both potential strategies.

Next, let me move on to multiple myeloma, which is another therapeutic area in which we have seen very interesting activity. In the first multiple myeloma Phase I study conducted, which was the combination of Perifosine and dexamethasone, we believe we proved a synergistic effect with these two agents. In this study, we took patients who failed single agent Perifosine; dex response was a modest duration stable disease of Perifosine alone; and added to Perifosine in those patients what most physicians would expect to be a sub-therapeutic dose of dexamethasone, particularly in a patient population in which 90% plus of those patients had already received higher doses of dex and 75% had seen prior iMiD, so that's Revlimid or Thalidomide and/or Velcade. The combination of Peri plus low-dose dex produced several partial responses, and an overall response rate with just PRs plus MRs of 28%.

This study was then followed by another Phase I study of the combination of Velcade plus Perifosine, and then upon progression, the addition of dex. These data were presented at ASH in 2007. All patients in this study had seen at least one prior treatment of Velcade, and most, 83%, were both relapsed and refractory to their last treatment. So this is a heavily pretreated patient population. The data showed the combination of Peri, Vel, dex induced a high level of response rates, higher than what might be expected to be seen in patients treated with Vel, dex alone. Of course, with the caveat that this was not a comparative study, and we are dealing with some very small patient numbers.

But let me explain. If you look at this in comparison to the pivotal Phase II summit study for Velcade, patients who failed one course of Velcade had dex added. 18% of those patients achieved a PR or MR. There were no CRs seen after the failure of one regimen with Velcade once dex was added. In the Perifosine Phase I study, 56% of the patients achieved CR, PR, or MR in addition to when Perifosine plus dex was added to these patients who failed one course of Velcade. Of particular interest is one Velcade refractory patient. The patient was previously treated with two prior Velcade-based regimens. We observed that upon the addition of Perifosine, this is Perifosine alone, not with the dex, the patient achieved a complete remission and remains today in complete remission now 18 months out.

The team at Dana-Farber, led by Ken Anderson and Paul Richardson, demonstrated synergy preclinically between Perifosine and Velcade, and this appears to be the translation of that affect into humans. We eagerly await final Phase II data on this combination with an expanded patient population of almost 60 patients, which is expected to be available for presentation at ASH in December of this year.

A final Phase I study of Perifosine, Revlimid and dex is underway and just about complete. This one is a little bit harder to interpret as to whether the combination offers any additional benefit over Revlimid alone as almost all the patients were not previously treated with Revlimid. One thing we can say based on the early data, which was presented in a poster at ASH last December, is that the combination appears to be well-tolerated and demonstrated very high response rates.

So, in summary, results from all three of these multiple myeloma studies continue to demonstrate that Perifosine has significant potential in the treatment of multiple myeloma when used in combination with established agents.

In terms of ASCO this year, we look forward to the presentation and discussion of our Phase II results of single-agent Perifosine in patients with Relapsed/Refractory Waldenstrom's and several published abstracts of Phase I combination studies with Perifosine plus tyrosine kinase inhibitors.

In summary, in 2008, we will continue to evaluate the activity of Perifosine in renal cell carcinoma and multiple myeloma as well as continue to explore the potential activity in several other tumor types, including brain tumors and sarcoma.

Let me stop here and turn the call back over to the conference operator to begin the Q&A session. Following the Q&A, I will return to make some brief concluding remarks. Conference operator?

Question-and-Answer Session

Operator

(Operator instructions) okay, and I am showing that our first question comes from Jonathan Aschoff. Please go ahead.

Jonathan Aschoff – Brean Murray, Carret & Co.

Hi, Mike, how are you doing?

Michael Weiss

Hey, Jonathan. How are you today?

Jonathan Aschoff – Brean Murray, Carret & Co.

Pretty well. I was wondering with the $47.6 million in cash, if you include the Torii $8 million, I have a note from the last call that you expected to end '08 with $40 million to $45 million. I was wondering is that’ still true? And if so, how do you get there?

Michael Weiss

I don't think we are going to end '08 with $40 million $45 million. I think our projection was to end '08 with closer to $25 million to $30 million.

Jonathan Aschoff – Brean Murray, Carret & Co.

Okay.

Michael Weiss

I don't recall having said we would end with $40 million to $45 million.

Jonathan Aschoff – Brean Murray, Carret & Co.

All right. Maybe it was bad note-taking, but $25 million to $30 million?

Michael Weiss

Yes.

Jonathan Aschoff – Brean Murray, Carret & Co.

That makes a lot more sense. Thanks a lot.

Michael Weiss

You got it. Thanks Jonathan.

Operator

Okay. And our next question comes from Matt Kaplan. Please go ahead, sir.

Matt Kaplan – Punk Ziegel & Co.

Good morning.

Michael Weiss

Good morning, Matt.

Matt Kaplan – Punk Ziegel & Co.

A couple things. With respect to the Zerenex program, you mentioned that we are going to get data by the end of the year for the dose escalation study. The animal studies that are ongoing, are those at all rate-limiting? Are those complete now, or --?

Michael Weiss

You know, we don't know if they are going to be rate-limiting. I think we need to actually see the results of those studies depending on what additional studies may need to be conducted. Our current projection is that we would enter Phase III sometime in the first half of '08. But, there is the potential that we would have to do longer-term animal tox studies, which could bring us out further.

Matt Kaplan – Punk Ziegel & Co.

And then in terms of the different dosage formulations, how many different dosage formulations are you working on right now?

Michael Weiss

I think we are at three or four different formulations.

Matt Kaplan – Punk Ziegel & Co.

Okay.

Michael Weiss

Two or three. By the way, just as a correction, obviously, we are looking at the first half of '09 for the Phase III, not first half of '08. Sorry about that.

Matt Kaplan – Punk Ziegel & Co.

Sure. And just on Perifosine, what data should we expect from – any data this year that we should expect from that program?

Michael Weiss

So we are going to present at ASCO, some Waldenstrom's Phase II data. There will be some abstracts just showing the combination with sorafenib and I think sunitinib. And then later in the year at ASH, we should be showing the combination with Peri, Vel, and also, Peri, Revlimid.

Matt Kaplan – Punk Ziegel & Co.

All right. Thank you.

Operator

And our next question comes from Philip Nadeau. Please go ahead.

Philip Nadeau – Cowen and Co.

Good morning. Thanks for taking my questions. My first is on future cash burn. Could you give us some idea of what you expect to burn over the next several quarters?

James Oliviero

This is James. How is going?

Philip Nadeau – Cowen and Co.

Good.

James Oliviero

Obviously our burn is going to decrease substantially now that Sulonex is out of the picture, and that was the biggest piece of our burn in the first quarter. We did say that we are going to – we are expecting for the next three quarters, so from second quarter through fourth quarter to incur somewhere between $10 million to $15 million cash burn. I would say three quarters of that would be on the R&D side. A quarter of it will be on the G&A side. And it will be – the second quarter – it will probably decrease a little bit more as you go throughout the year because we are still phasing out some of our legacy studies of Perifosine.

Philip Nadeau – Cowen and Co.

Okay. And on your cash balance, if I interpreted what you said correctly, you have about $47 million, $48 million in cash and receivables. $17 million or $18 million of that probably should be netted against the accounts payable, so you have about $30 million net. And of the $30 million, $10 million is an auction rate securities. So as we look towards the end of the year, is it --- or over the remainder of the year, is it kind of safe to assume that you have $20 million in liquid cash that's not already netted against an account payable?

James Oliviero

I would say that the – by the end of the year, is what you are saying?

Philip Nadeau – Cowen and Co.

No, I mean today. If you have $47 million in cash and receivables today, and $18 million in payable?

James Oliviero

Because you are taking out the $10 million of auction rate securities is what --

Philip Nadeau – Cowen and Co.

Yes, that's right.

Michael Weiss

We obviously think that the auction rate notes will resolve themselves so we can use them. But yes, I think we wanted to be obviously clear to the conservative side of where we stood in terms of the cash position.

Philip Nadeau – Cowen and Co.

Okay, fair enough. Thank you.

Operator

And at this time I am showing that there are no further questions. So I would like to turn the call back over to Mr. Michael Weiss. Please go ahead.

Michael Weiss

Thank you. So let me conclude by reminding everyone of some upcoming milestones which we believe investors can focus on for the remainder of 2008. First with Zerenex, the Phase II study, high-dose study has been initiated, and we expect to complete enrollment by the end of the year. Tox studies are ongoing and results of the 90-day studies are expected also later this year. With respect to Perifosine, the goal for the year is to get a better sense of the activity in renal cell carcinoma and multiple myeloma before moving forward. We will be receiving updates on the renal cell carcinoma and multiple myeloma trials over the course of the year, which we hope will bring us closer to a registration program. Finally, we hope this will be an important business development year for the company on all fronts, in-licensing, product acquisitions, and possibly even partnering with some of our portfolio programs.

So with that, let me thank everyone for their support during these trying times. We do appreciate the support and are confident in our ability to turn around the company following the failure of our former lead program. Thanks, everyone. Have a nice day.

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