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Targacept (NASDAQ:TRGT)

Q2 2012 Earnings Call

August 07, 2012 5:00 pm ET

Executives

Mark B. Skaletsky - Chairman, Member of Governance & Nominating Committee and Member of Compensation Committee

David A. Hosford - Vice President of Clinical Development and Regulatory Affairs

Alan A. Musso - Chief Financial Officer, Principal Accounting Officer, Senior Vice President of Finance & Administration, Treasurer and Assistant Secretary

Analysts

Alethia Young - Deutsche Bank AG, Research Division

Mark Vignola

Jon LeCroy - MKM Partners LLC, Research Division

Operator

Good day, ladies and gentlemen, and welcome to the Quarter 2 2012 Targacept Earnings Conference Call. My name is Ian, and I will be your operator for today. [Operator Instructions] And as a reminder, this call is being recorded for replay purposes.

Before I turn the call over to Mark Skaletsky, Chairman of Targacept's board, let me first inform you that comments today may include forward-looking statements made under the Private Securities Litigation Reform Act of 1995. Forward-looking statements relate to plans, expectations, objectives, future events or financial results or conditions, including, for any of Targacept's product candidates, the design, scope or other details of clinical trials, the timing for initiation or completion of, or for reporting of results from clinical trials, or for submission or approval of regulatory filings, target indications or commercial opportunities. Any payments Targacept may receive from AstraZeneca, AstraZeneca's development plans for product candidates licensed from Targacept, cash runway, revenues or expenses, plans, expectations or any other matter that is not a historical fact.

Actual results may differ materially from those expressed or implied by any forward-looking, statement as a result of many factors, including those described under the heading Forward-Looking Statements in Targacept's press release from earlier today or under the heading Risk Factors in Targacept's most recent Form 10-K or later filings with the SEC.

Targacept cautions you not to place undue reliance on any forward-looking statement. Also, any forward-looking statement that is made speaks only as of today and should not be relied upon as representing Targacept's views as of any future date. Targacept disclaims any obligation to update any forward-looking statement, except as required by applicable law.

And now, I'll turn the call over to Mark.

Mark B. Skaletsky

Thank you, Ian, and good afternoon, everyone. This is Mark Skaletsky. Alan Musso, Targacept's Senior Vice President, Finance and Administration and Chief Financial Officer; and Dr. David Hosford, Targacept's Vice President, Clinical Development and Regulatory Affairs, are also here with me today.

Before we move forward with the primary focus of today's call, I want to just take a moment to mention that the search process for a new CEO for Targacept is actively proceeding. In the interim, as we announced in June, the Board of Directors has created the Office of the Chairman to guide the company's strategic direction, resource allocation and pipeline development. Until a new CEO is in place, I will be working closely with Alan; Jeff Brennan, Targacept's Chief Business Officer; and Pete Zorn, Targacept's General Counsel.

These gentlemen have worked together for nearly 10 years, and I have the utmost confidence that they are the right team to lead the company through this transition as we continue to build the foundation for future success at Targacept.

While the company underwent many changes in the second quarter, what hasn't changed is our commitment to pursuing the development of new medicines for patients who need them, while at the same time, building value for shareholders.

And with that, let me please turn the call over to David Hosford, who will give you an update on Targacept's clinical pipeline.

David A. Hosford

Thank you, Mark, and good afternoon, everyone. Let me start with an update on our Phase II clinical studies of TC-5619, our wholly-owned new chemical entity, which is highly selective for the alpha7 neuronal nicotinic receptor subtype, and has been consistently well tolerated in clinical trials to date. We are currently running a Phase IIb study in negative symptoms and in cognitive dysfunction in schizophrenia, as well as a Phase II study of 5619 in adults with the inattentive-predominant subtype of ADHD. I'll start with an update on the ADHD study because this is a more near-term readout for us.

We are conducting this study at sites in the U.S. with the goal of evaluating approximately 150 patients. The study is designed to assess efficacy, safety and tolerability of this molecule over a 4-week treatment period, with the inattention subscale of the Conners' Investigator-Rated Adult ADHD Rating Scale as the primary endpoint.

Patients are receiving 1 of 2 doses of either 5619 or placebo, randomized in a ratio of 1 to 1 to 2, which means that approximately half of the patients receive placebo. At this point, the study is fully enrolled, and we expect to report top line results next month.

To give you some context for the study, in our previous Phase II study in adults with ADHD, we saw encouraging findings in the inattentive-predominant subpopulation for 5619 versus placebo on the Conners' Investigator-Rated Adult ADHD Rating Scale, both on the total score and on the inattention subscale, as well as concordance on the patient-rated version of the same scale, where 5619 outperformed placebo on 4 out of 5 subscales.

We see this ADHD subtype as a significant unmet medical need because there is no drug on the market today that is approved specifically for inattentive-predominant patients. According to the market research firm Decision Resources, there are over 47 million people with ADHD in the world's 7 major pharmaceutical markets, including both adult and pediatric patients. Around 60% of pediatric ADHD is the inattentive-predominant type, and it is well-known that inattention is the more pronounced feature of ADHD in adults.

We are also conducting a Phase IIb study of 5619 in negative symptoms and cognitive dysfunction in schizophrenia, features of the disease that severely impact the ability of patients to effectively function in society. The primary endpoint for this study is the Scale for the Assessment of Negative Symptoms, or SANS, which was a secondary endpoint in a previous 12-week schizophrenia study that we conducted, in which 5619 showed a statistically significant positive effect. We plan to enroll approximately 450 patients into this study at sites in the U.S. and in Eastern Europe. Enrollment is progressing, and we continue to anticipate that we can report top line results in the middle of 2013.

We have long recognized the promise for compounds that act on the alpha7 and in our subtype to positively impact cognitive symptoms across a variety of disorders. And as I mentioned earlier, TC-5619 is highly selective for alpha7. Our enthusiasm for the broad potential of 5619 was reinforced at the Alzheimer's Association International Conference just a few weeks ago, with the announcement of a positive Phase II study in Alzheimer's disease with another company's alpha7-targeted compound.

These findings added to the growing body of scientific evidence supporting alpha7 as an important therapeutic target, and we are continuing to assess potential Phase II development for 5619 in Alzheimer's disease, in addition to schizophrenia and inattention-predominant ADHD.

Another well-tolerated alpha7 modulator in our portfolio is TC-6987. We announced results from an exploratory Phase II study of this compound in asthma this past spring. While we saw a modest efficacy signal in that study, we've decided as a matter of portfolio prioritization not to conduct further development of 6987 in asthma at this time. Nevertheless, in light of the advancements seen in the alpha7 space, we recognize that 6987 could become an important asset for us as we move forward.

Next, I'll say a few words about our 2 clinical stage alpha4beta2 modulators licensed to AstraZeneca: AZD3480 and AZD1446. We are currently running a 12-month Phase IIb study of 3480 as a monotherapy head-to-head study with donepezil in mild to moderate Alzheimer's disease.

In the case of 1446, we had disclosed previously that we expected AstraZeneca to initiate an adjunctive study in Alzheimer's disease. However, while AstraZeneca has continued to convey to us interest in advancing 1446, in light of its restructuring of its neuroscience therapy area earlier this year, the target indication and the timing of the next clinical trial are uncertain at this point. We will continue to update as plans for this promising compound evolve.

Finally, our collaboration with AstraZeneca for the development of TC-5214 terminated this quarter, and we are nearing completion of the transition of the asset and accompanying data back to Targacept. We believe nicotinic channel modulators like 5214 have promise in various therapeutic areas and recognize that an extensive clinical profile has been generated for 5214. At this point, we are continuing to assess possible future development paths for this late-stage molecule.

And with that, let me turn it over to Alan Musso for an update on our financials. Alan?

Alan A. Musso

Thanks, David. Let me take just a few minutes to review our financial results for the second quarter of 2012. We ended the second quarter with a cash balance of $205.9 million, invested in cash and investments. Our net income was $14.5 million for the second quarter of 2012, compared to a net loss of $2.3 million for the second quarter of 2011. The net income position for the 2012 period was principally due to an increase of $12.9 million in deferred revenue recognition and a decrease of $7.7 million in research and development expenses, partially offset by a $2.3 million charge relating to our restructuring.

For the 6 months ended June 30, 2012, our net income was $16.8 million, compared to net income of $10.3 million for the corresponding period of 2011. Our higher net income for the 2012 period was primarily due to a decrease of research development expenses of $13.4 million, partially offset by a decrease of $3.2 million in deferred revenue recognition and $2.3 million in charges relating to our restructuring.

Looking forward, as the revenue recognition period for the 5214 upfront payment from AstraZeneca concluded in the second quarter of 2012, we expect that our net operating revenues for the remainder of 2012 will be substantially lower than for the first 6 months of the year.

Let me now close on the prepared remarks by saying that during this transition period for Targacept, our senior management team remains focused on quality execution of our development programs and the efficient use of capital. We look forward to the upcoming clinical readout from our Phase II study of TC-5619 in inattentive-predominant ADHD. And as David mentioned, we expect to report top line results from this study next month.

And with that, we'll now open up the call for questions.

Question-and-Answer Session

Operator

[Operator Instructions]

Our first question comes from the line of Robyn Karnauskas of Deutsche Bank.

Alethia Young - Deutsche Bank AG, Research Division

It's Alethia for Robyn. Just had a couple of questions about the enrollment strategy on the schizo trial, just kind of wanted to get some color on how -- if the strategy remains intact or if there have been any changes. And kind of, if enrollment were going slower than expected, how might you go about kind of managing that. I'm just basically curious about how you'll work to keep the timelines on track with that program.

David A. Hosford

Right. That's a very good question. And schizophrenia is always at times a challenge to recruit, particularly with a trial that focuses on negative symptoms. What we've done is to, with our CRO, identified high-quality clinical trial sites, which have experience in enrolling patients with schizophrenia. And we continue to anticipate that we will enroll in time to report results out mid-2013.

Operator

Our next question comes from the line of Alan Carr of Needham & Company.

Mark Vignola

This is actually Mark on the line for Alan. My first question just has to do with the guidance that you guys gave in May. I think we have down here, $175 million in cash remaining at the end of the year, operating expenses $65 million to $75 million. Operating revenue is $50 million to $60 million. Are you guys going to give us any more -- is that guidance being reiterated, or is that being taken off the table?

Alan A. Musso

No, that guidance is current, so we are still expecting that we'll end the year with at least $175 million. The numbers that you went through, net operating revenues of $50 million to $60 million and operating expenses of $65 million to $75 million is still the current guidance. We've also further guided that we expect that our cash balance will be sufficient to operate the company at least through 2015, so that all remains the current guidance.

Mark Vignola

Great. Okay. A few other questions, if you don't mind. I was just wondering, you guys commented a little bit on the EnVivo compound, the 6124. The reported results -- you guys have any comparisons how 5619 might be differentiated from 6124? How does that translate to the Targacept effort?

David A. Hosford

Yes. This is David. We were very encouraged by seeing EVP-6124's results presented at the AAIC Conference last month, as well as by their positive results in a prior schizophrenia trial that they reported out last year. When we compare those findings with those that we've reported also from our own schizophrenia and ADHD trials, we think that this helps to validate the alpha7 target for cognitive disorders. And then when we look at TC-5619's track record in these trials, as well as its generally safe and well-tolerated profile in the trials conducted to date, we remain confident that we can progress this compound and see success in the trials that are ongoing right now.

Mark Vignola

Great. And then just one more if I can, just a quick couple of housekeeping. I know you guys talked about 3480. And I was wondering if you could let us know if we're still looking at results expected in the fourth quarter of next year? And the same question for 1446 and Alzheimer's. Are we still looking at results in the fourth quarter of '13 for those?

Alan A. Musso

Yes. On the 3480 program, we're still on target to have the top line results available by the end of next year. In the case of 1446, we mentioned that today that because of the shift in the neuroscience group at AstraZeneca and other changes they've made, they've indicated to us that they still have interest in that program and they still remain interested in the alpha4beta2 molecule as a development candidate. But they're rethinking the next trial for 1446, so we're no longer expecting that they will [indiscernible] an Alzheimer's trial later this year.

Operator

[Operator Instructions] We do have a further question. Our next question comes from the line of Joel Godin [ph] of Godin Enterprises.

Unknown Analyst

It's in reference to the workforce. I understand that half of it was reduced. Were these critical positions, how is that going to affect further research and operation of the company?

Alan A. Musso

Yes, that's correct. We did, in the spring, make a difficult decision to reduce about 50% of the workforce, and it was a decision that was taken after a very extensive analysis, and it was a very deliberative process. That effort was to accomplish a focus more towards the clinical stage molecules and select preclinical candidates and reduce the capacity that we had for research and discovery. So we do think with the company's current workforce, it's well suited to the execution of the ongoing programs and will serve us well as we move forward.

Operator

[Operator Instructions] Our next question comes from the line of Jon LeCroy of MKM Partners.

Jon LeCroy - MKM Partners LLC, Research Division

My question is just on 5619 and ADHD. What would be your next steps with that program if everything turns out successfully?

David A. Hosford

Good question. We anticipate looking at those results, considering them in light of the prior results, and then likely having a conversation with the FDA and perhaps other regulatory authorities before we make a final decision. Possibilities would include going ahead with the inattentive-predominant ADHD subtype as our therapeutic indication we would pursue to market. Others might include looking at it as adjunctive therapy with stimulants in all types of patients with ADHD. There are a whole host of possible directions we might take. And until we can look at all the results and have those regulatory discussions and then look at our portfolio, consider all these things together, we won't know for sure.

Jon LeCroy - MKM Partners LLC, Research Division

So would you expect it to move into Phase II again? Or would that be something that possibly can move straight into Phase III?

David A. Hosford

I think we'd have to look at the results and look at our portfolio at that point and make that decision then, so I can't really say right now.

Operator

Our next question comes from the line of Robyn Karnauskas of Deutsche Bank.

Alethia Young - Deutsche Bank AG, Research Division

It's Alethia again. I actually -- my question was the prior one about the ADHD, but just on that -- just a general big picture question, just kind of, can you update us on kind of how the transition is going and just kind of the operations of the company, on that level, please?

Mark B. Skaletsky

Yes. This is Mark. We -- As you know and I hope we make sure that we leave you with this thought that we really believe in the value of the pipeline that we're developing. We've had some ups and downs of the situation here and there, but the belief is still there. The people and the company are still dedicated to what's going on. And certainly, the Board of Directors is wholly in favor of the company moving forward in a very significant way.

Operator

I would now like to turn the call back over to Alan Musso for closing remarks.

Alan A. Musso

Very well, thank you, everyone, for joining us on the call today, and we look forward to keeping you posted as things progress. Have a good evening.

Operator

Thank you for your participation in today's conference. This concludes the presentation. You may now disconnect. Good day.

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